After a lifetime of saving, many people have accumulated a hefty amount of money as retirement beckons. A recent report showed nearly half of 401(k) accounts had a balance of $1 million or more, which is impressive.
But regardless of how much or how little money soon-to-be retirees have saved, one big question often haunts them: Will my savings be enough to see me through 20, 30 or more years of retirement? The uncertainty leaves some people afraid to spend too much beyond necessities, worried the money will dry up while the long retirement runway still stretches before them.
It does not have to be this way. You can begin to take the guesswork out of retirement spending by assigning purpose to your money. This will help you feel more confident you won’t wake up one morning to discover your savings have vanished.
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Ideally, as you approach this task, you divide that purpose into three categories: Income, protection/lifestyle and legacy.
Each category is essential, but how much of your savings finds its way into each category will depend on your situation, needs and long-term goals. It’s not as easy as allocating one-third to each category and declaring yourself set. That won’t work and could provide disastrous results.
At the same time, the situation isn’t so complex that it’s beyond explaining. Let’s take a look at each of the three purposes and explore how to fund them.
Income
This is your money’s first purpose: to provide a steady income stream to replace the paycheck that’s no longer deposited in your bank account. Review what guaranteed streams of money you are expecting, such as Social Security, a pension, an annuity or interest on bonds or CDs.
Then with your retirement savings — a 401(k), an IRA or another type of account — determine what percentage you can withdraw each year to add to your income without draining that account sooner than you want. In years past, people followed the 4% rule, which said you should withdraw 4% from your savings the first year of retirement, then increase that amount each year to account for inflation.
Unfortunately, the 4% rule became outdated during the 2008 financial crisis and the optimum withdrawal rate dropped. More recently, the rule has made something of a comeback and 4% is once again becoming a reasonable target withdrawal rate after being at 3.3% in 2021 and 3.8% in 2022, according to a 2023 study by Morningstar.
Protection/lifestyle
Unexpected expenses happen in retirement just as they do throughout the rest of life. Perhaps your house needs a new roof. Or your vehicle breaks down, forcing you to invest in a costly repair or a new car.
At the same time, many people choose to travel in retirement, which is often a significant expense in itself and doesn’t fit neatly into the monthly budget.
Such expenditures are the second purpose for your money. You want money set aside to pay for extra expenses outside the monthly budget, whether those expenses are for fun or for dealing with sudden catastrophes. Most likely this money won’t draw a large amount of interest because it needs to be safely invested and available quickly if the moment arises.
One potential expense that falls into the protection purpose and can devastate your savings is long-term care, which many people will need in retirement. Because of the extraordinarily high cost of such care, this expense can be more difficult to plan for. Options include long-term care insurance or a life insurance policy that includes a long-term care rider. Some life insurance policies also include a chronic illness rider, which allows the policyholder to use part of the death benefit while they are still alive to pay for treatment of the chronic illness. As the need for and expense of long-term care has grown, some states have explored creating their own long-term care insurance programs.
Legacy
A third purpose for your money in retirement is legacy — what you hope to leave behind for family members or a favorite charity. As you devise plans for this money, you will want to look into strategies that can help you minimize the amount that goes to the IRS. Just one strategy that can help avoid or reduce estate and inheritance taxes is to start giving your heirs some of the money now as gifts. You can give each individual person up to $18,000 annually before a gift tax comes into play. A married couple can give $18,000 each, or a total of $36,000, to an individual (in 2025, that goes up to $19,000 per person, or $38,000 for a married couple).
The purpose you give your money in retirement is ultimately up to you, but a financial professional can provide guidance on how you can get the most out of that money, regardless of whether it’s for income, protection/lifestyle or legacy.
It’s important to plan because without determining the purpose for your money, the money will manage you rather than the other way around.
Ronnie Blair contributed to this article.
The appearances in Kiplinger were obtained through a PR program. The columnist received assistance from a public relations firm in preparing this piece for submission to Kiplinger.com. Kiplinger was not compensated in any way.
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