At a glance

  • When retirement is about 5 years away, figure out how much you’ll need to withdraw from your savings to cover any difference between your income and expenses.
  • When retirement is a few weeks away, direct your investment income (interest, dividends, and capital gains distributions) to a go-to account so it’s available to spend.
  • When you’re retired, keep investing and maintain a diversified portfolio.

Moving from being a saver to a spender (gasp!) can be scary, but it’s a transition that you’ve been preparing for—maybe since you earned your first paycheck. Here are some tips for spending your savings so they last.

When you’re about 5 years from retirement

Set yourself up for a seamless transition by answering these questions about 5 years before you retire.

What expenses will I have in retirement?
You can use a worksheet to calculate your probable monthly or annual expenses in retirement, or you can assume that you’ll need about 75%–85% of your current annual salary each year you’re retired.

“Whichever method you use to determine your expenses, stay flexible! For most, the amount you may need to pay for future health care expenses is one of the biggest areas of ambiguity and anxiety,” said Colleen Jaconetti, a senior investment strategist in the Vanguard Investment Strategy Group. “If you’re 65 years old, you can expect to pay between $124,000 and $140,000 in health care expenses for the remainder of your lifetime on Medicare premiums alone.* But don’t panic—that number becomes more manageable when you break it down.”

Colleen Jaconetti

According to HealthView health care cost-projection software, the average monthly health care expense for a couple at age 65 is $583. The amount goes up incrementally as you get older, but other costs—such as travel expenses and housing costs—may go down.

How much income will I have in retirement?
When you’re coming up with a ballpark figure, consider all potential sources of income: Social Security; a pension; income from a job or a rental property; required minimum distributions (RMDs); interest, dividends, and capital gains from taxable (nonretirement) accounts, and veterans benefits.

How much, if any, do I need to withdraw from my savings to cover the gap between my income and expenses?
If your postretirement income won’t cover your expenses—a pretty common scenario—make a plan to bridge the gap.

  • Choose a retirement spending strategy.
    • To use a dollar plus inflation strategy, select an initial dollar amount to spend each year and increase that amount annually by inflation.
    • To use a percentage of portfolio strategy, withdraw a consistent percentage (usually 3%–5% is a good target) of your portfolio each year.
    • To use a dynamic spending strategy, choose the percentage of your portfolio you’d like to spend each year as well as an acceptable range for increasing or decreasing your annual spending amount depending on market performance.
  • Keep in mind that each year is different—you may need to withdraw more than planned one year, but you may be able to make up the difference in another year.
  • If you don’t think your savings can support you throughout retirement, consider working part-time, delaying retirement, or reducing your nonessential expenses.
*Source: Employee Benefit Research Institute. Notes, October 2015. Amounts exclude long-term care costs.

More information:
Retirement income: Spending your savings
How to put a dynamic retirement spending strategy in place
Health care costs in retirement
Get help creating a retirement plan


When you’re preparing to collect your final paycheck

It’s time. Let the withdrawals begin.

Fund a go-to account
Keep the money you need to cover your daily living expenses in a checking account or money market account that won’t fluctuate in value.

If you have to take an RMD from a tax-deferred retirement account or inherited IRA, direct it to this account. If you don’t need to use your RMD right now or within the next year, consider investing it in a tax-efficient stock or bond fund in your taxable account.

If you have taxable accounts that generate cash flows (interest, dividends, and capital gains), direct these amounts to your go-to account rather than reinvesting. This will help you avoid the possibility of being taxed twice—once when your fund makes a distribution and potentially again when you withdraw the income.

Once a year, consider moving money from your retirement account to your go-to account, and use it to pay bills and cover your living expenses for the year. Moving a year’s worth of withdrawals out of your retirement account at one time is convenient, and it prevents you from having to transfer money whenever you need cash—especially if the market value of your investments is down.

Make tax-efficient withdrawals
You put a lot of thought into saving for retirement. Putting some thought into spending your savings can minimize your taxes and help extend how long your savings last.

“The goal is to spend from your tax-deferred accounts when you believe your tax rate will be the lowest,” said Jaconetti. “The guidelines below can help you maximize lifetime spending. If you have a different goal, such as preserving assets for your heirs, I suggest you speak with a qualified tax advisor.”

If you expect your future tax rate to be higher than your current tax rate, consider spending your assets in this order to minimize the impact of taxes:

  1. Taxable accounts. Withdraw from nonretirement accounts, such as joint or individual investment accounts.
  2. Tax-deferred accounts. Withdraw from retirement accounts, such as traditional IRAs and 401(k)s.
  3. Tax-free accounts. Withdraw from retirement accounts, such as Roth IRAs and Roth 401(k)s.

If you expect your future tax rate to be lower than your current tax rate, consider spending your assets in this order to minimize the impact of taxes:

  1. Taxable accounts. Withdraw from nonretirement accounts, such as joint or individual investment accounts.
  2. Tax-free accounts. Withdraw from retirement accounts, such as Roth IRAs and Roth 401(k)s.
  3. Tax-deferred accounts. Withdraw from retirement accounts, such as traditional IRAs and 401(k)s.

More information:
Making your savings last through retirement


When you’re retired

Retirement isn’t the end of the road. “As average life expectancies increase, retirement is lasting longer. In fact, some people live about a third of their lives after retiring,” Jaconetti said.

When you retire, your time horizon for needing a portion (about 3%–5%) of the money you’ve saved is right now—but your time horizon for needing the majority of the money you’ve saved is still pretty far away. Keep that in mind when you’re selecting your asset mix.

“A diversified portfolio is as important now as it was while you were saving, and for the same reason—it lowers your overall risk. If you’ve been moving to a more conservative mix for the past decade or so, you may not need to make any changes,” said Jaconetti.

You may not be actively contributing to your retirement accounts when you’re retired, but your assets remain invested—meaning there’s still opportunity for growth and compounding.


More information:
Choosing your asset allocation
The relationship between risk, reward, and time


Notes:

All investing is subject to risk, including the possible loss of the money you invest.

Diversification does not ensure a profit or protect against a loss.

We recommend that you consult a tax or financial advisor about your individual situation.