Twists and Turns of Spending Retirement Cash

Even though you may have wisely invested in a 401(k) plan or other retirement account, some of your toughest money decisions lie ahead.  Unfortunately, you will not receive much help in making these decisions.  For retirees, choices about how to spend a life’s worth of savings are fraught with tricky calculations about financial risk, taxes, and death. 

Baby boomers across the nation worry that they may outlive their life savings.  The government helps workers save money in tax-deferred accounts, but offers little guidance on when it should be spent.  The requirement for annual distributions from tax-advantaged accounts simply depletes the money.  “There’s sort of a money illusion when you have a big lump sum of money sitting in your 401(k) account.  You think you’re rich.”  For a 65-year-old man, $100,000 buys an annuity that pays $572 a month for life.  However, this is not what people see, and sometimes forget to think about the income taxes they will owe. 

The government has taken limited steps to ease the spending-down phase of retirement; a “clear direction is lacking.”  President Obama has proposed eliminating the required distribution for people with account balances of less than $100,000 to simplify the system and save taxpayers millions.  This proposal has been stalled. 

Another problem is that minimum distribution tables have not been updated since 2002.  Since then, average life expectancy has increased by ten percent for men and seven percent for women.  Yet for an individual, the right decision on how much to withdraw depends on lifestyle, risk tolerance, and life expectancy.

See Richard Rubin, Spending Retirement Cash Can Be Fraught With Tricky Calculations, The Boston Globe, Oct. 15, 2014.