I’m 72 and married to my spouse, 71. We have one son, 45, who lives in California. We give him and his family $20,000 a year. Between us, with pension income and Social Security, we’re now receiving a little over $100,000 a year (gross) living in Florida. We own a $400,000 home paid for, along with two cars.
My wife and I aren’t sure what we should do with our money. We don’t need the money so our IRA and Roth accounts sit and keep growing. Our combined IRAs total about $1.3 million, with $690,000 in Roth accounts, and our regular savings with Vanguard has about $1.08 million. We have outside checking and savings totaling $70,000.
We did have a financial adviser for 10 years, but we let him go as we didn’t believe he helped us a lot. Should I leave the money as is or roll it into a Roth? I’m open to suggestions.
Having millions of dollars you don’t need and being able to just sit in several accounts is a pretty good problem to have, and a testament to the way you and your spouse have saved through the years.
But you’re right, it’s best to be proactive and get that money working for you.
One of the best tools retirement savers have is diversification, and that can come in many forms. The two most influential, perhaps, are asset diversification and tax diversification. With the former, you’re using multiple types of asset classes in your portfolio construction, so that you have a mix of conservative and aggressive investments that work together when one part of the market is down (or the other is doing particularly well). The latter refers to the vehicles you’re using, and the ways you withdraw from them.
It’s good to have a mix of accounts — taxable, tax-deferred and after-tax assets — because it gives you more power in deciding how much you pay in taxes. For example, if in the future you want to withdraw some of your savings but don’t want to pay a hefty tax bill, you can tap into a Roth account (assuming you’re following the rules and taking qualified distributions) so that your withdrawals are tax-free. If you want to preserve your Roth accounts but need extra cash, you can withdraw from a tax-deferred account, such as a traditional IRA, but only take as much as you can up to the top of your tax bracket, so that you’re not pushing into the next bracket. You can always do a combination of distributions, too.
Roth accounts are great to have, and could even lead to a tax-free inheritance for your loved ones. They do come with rules, though. For example, in order to really reap the benefits of a Roth account, you’d have to have that account with your converted assets open for five years (which is a separate five-year clock from when you opened your own Roth IRAs).
How much you convert to a Roth account is entirely up to you, but you will pay taxes when you make that conversion (so you probably don’t want to go overboard). You can also use some of your cash savings to pay the tax bill on that Roth conversion so that the account’s balance doesn’t dwindle as a result of the transfer.
Having liquid assets is imperative at any age, but especially in retirement. That said, you have more than enough to cover a few years’ worth of living expenses. Before making any drastic moves, be very considerate and thoughtful about the type of investments you choose for your savings — and make a plan you can regularly revisit (say, once every six or 12 months, and definitely after major life events).
I know you said your financial adviser didn’t help you much, but it shouldn’t dissuade you from consulting another qualified and trustworthy professional, who is also a fiduciary. Advisers at the investment firms housing your assets can be helpful, but there are plenty of other professionals who could be helpful, including certified financial planners. They can build you one or more portfolios to meet all of your needs, explain in detail the types of investments you should have in your accounts and also coordinate any tax and estate liabilities. I recommend at the very least shopping around for a planner, and conducting a few interviews. You don’t have to work with anyone, of course, but this exercise may be useful and you may connect with someone who can make it easier to save and enjoy the money you’ve accumulated.
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Have a question about your own retirement savings? Email us at HelpMeRetire@marketwatch.com
Around the U.S., a $1 million nest egg can cover an average of 18.9 years worth of living expenses, GoBankingRates found. But where you retire can have a profound impact on how far your money goes, ranging from as a little as 10 years in Hawaii to more than than 20 years in more than a dozen states.
If you retire at 62 with $1.5 million saved, applying the 4% rule suggests an annual withdrawal of $60,000 or about $5,000 per month. This rule assumes an annual withdrawal rate of 4%, adjusted for inflation, to sustain your savings for 30 years or more.
Then when you're retired, defined as older than 59 ½, your distributions are tax-free. They are also tax-free if you're disabled or in certain circ*mstances if you're buying your first home.
Generally, early withdrawal from an Individual Retirement Account (IRA) prior to age 59½ is subject to being included in gross income plus a 10 percent additional tax penalty. There are exceptions to the 10 percent penalty, such as using IRA funds to pay your medical insurance premium after a job loss.
According to EBRI estimates based on the latest Federal Reserve Survey of Consumer Finances, 3.2% of retirees have over $1 million in their retirement accounts, while just 0.1% have $5 million or more.
Once you have $1 million in assets, you can look seriously at living entirely off the returns of a portfolio. After all, the S&P 500 alone averages 10% returns per year. Setting aside taxes and down-year investment portfolio management, a $1 million index fund could provide $100,000 annually.
We did the math—looking at history and simulating many potential outcomes—and landed on this: For a high degree of confidence that you can cover a consistent amount of expenses in retirement (i.e., it should work 90% of the time), aim to withdraw no more than 4% to 5% of your savings in the first year of retirement, ...
Once you turn age 59 1/2, you can withdraw any amount from your IRA without having to pay the 10% penalty. Regular income tax will still be due on each IRA distribution. You can continue to defer paying income tax on the funds in your IRA until you withdraw the money from the account.
You can receive benefits even if you still work. Waiting beyond age 70 will not increase your benefits. You can claim your retirement benefits now. Because you are age 70 or older, you will receive no additional benefit increases if you continue to delay claiming them.
While this is a lot of money, it's well within reach for most incomes. As long as you start saving early – ideally in your 20's – and take advantage of market returns, you can hit $1.5 million in retirement savings with even modest contributions to your retirement account.
Putting that much aside could make it easier to live your preferred lifestyle when you retire, without having to worry about running short of money. However, not a huge percentage of retirees end up having that much money. In fact, statistically, around 10% of retirees have $1 million or more in savings.
SmartAsset: Can I retire comfortably with $1.5 million at 45? The 4% rule suggests that a $1.5 million portfolio will provide for at least 30 years approximately $60,000 a year before taxes for you to live on in retirement.
You won't get a tax deduction for the year you contribute to a Roth IRA or Roth 401(k), but you don't have to pay income tax on the account's investment growth and you can make tax-free withdrawals if your account is at least five years old and you're at least age 59 1/2.
Once you turn age 59 1/2, you can withdraw any amount from your IRA without having to pay the 10% penalty. Regular income tax will still be due on each IRA distribution. You can continue to defer paying income tax on the funds in your IRA until you withdraw the money from the account.
Once you hit age 73*, the IRS requires you to start withdrawing from—and paying taxes on—most types of tax-advantaged retirement accounts. You may also be required to take RMDs from retirement accounts you inherit. In most cases, RMDs are treated as ordinary income for tax purposes.
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