Making Money Last in Retirement

Money 2000 and Beyond A retiree's money lasts longer when assets are withdrawn in a tax-efficient manner:
  • Generally this means tapping taxable accounts (i.e., investments other than IRAs and tax-deferred employer plans) first, since they were made with after-tax dollars and taxes have already been paid on investment earnings.
  • Another good initial source of money, for initial retirement asset withdrawals, is tax-free assets, such as municipal bonds or municipal bond funds, where no tax is due.
  • If possible, late savers should wait until age 70½ to tap their tax-deferred accounts. This is the age when minimum withdrawals must be made from most retirement accounts (exception: Roth IRAs, where withdrawals are tax-free if certain qualifications are met).
  • If tax-deferred money is needed before age 70½, first tap tax-deferred accounts that were made with after-tax dollar contributions, such as fixed or variable annuities and non-deductible Traditional IRAs. Then tap before-tax dollar savings, if needed.
  • Withdrawals from Roth IRAs should be made last because they have no minimum withdrawal age and earnings grow tax-free. Also, if Roth IRA money is not spent during a person's lifetime, it can be bequeathed to his or her heirs.
Another way to stretch retirement savings is to work, full or part-time, after retirement. Semi-retirement (e.g., working 2 or 3 days a week after one begins to collect Social Security and/or a pension) with a new employer or starting a home-based business or other type of freelance work are common catch-up strategies. In addition to providing income, work after retirement can provide a sense of fulfillment, social contact, and a daily routine.

The major financial benefit of semi-retirement is that it reduces the amount of money that must be withdrawn from investments to supplement retirees' Social Security and/or a pension. This has the effect of stretching retirement assets, which is a tremendous advantage for late savers who are retiring with limited funds.

Two possible disadvantages of working after retirement are Social Security earnings limits for beneficiaries age 62 to Full Retirement Age (the 2004 earnings limit is $11,640 with a $1 reduction in benefits for every $2 earned over this amount) and taxation of up to 50% or 85% of Social Security benefits at certain levels of household income for single and joint tax filers.

An example of how income from a post-retirement job can make your money last longer is two people with $100,000 of savings who need $12,000 annually to supplement their pension and Social Security. A non-working retiree withdraws $12,000 annually for as long as the money lasts and is in danger of outliving the assets. Another retiree withdraws $3,000 (3%) and earns the remaining $9,000 from a part-time job.

Research studies indicate that retirees with stock in their portfolio should withdraw no more than 4% to 4.5% of their savings annually to avoid outliving their assets. Conservative investors should withdraw even less. In the above scenario, the amount withdrawn by the second retiree is within the generally recommended limit.

  1. Rutgers
  2. Executive Dean of Agriculture and Natural Resources
  3. School of Environmental and Biological Sciences