Controlling Your Retirement Age

No matter how you envision your retirement, you still have to figure out how you’ll cover your costs when you no longer have a paycheck. Well before you retire, determine what your current expenses are and which of them you expect to carry into retirement. “If I had to put my finger on the one issue for people coming into my office, it’s that they don’t know what they’re spending,” says Kevin Reardon, a certified financial planner in Pewaukee, Wisconsin.

The process doesn’t have to be arduous or time-consuming, he says. “Go to your credit card and checking account statements over the past three to six months and look at your average monthly spending. You’ll get a picture of your annualized expenses, and you can probably do it in 20 minutes or less.” Make one list of ongoing, essential costs, such as food, housing and clothing, and another for the nice-to-haves, such as club memberships and hobbies. Don’t neglect to plan for big, occasional expenses – say, a new roof.

Once you’ve gotten a handle on those expenses, match them to income – any pensions and Social Security payments, plus the annual amount you intend to withdraw from savings. Be sure to factor in taxes on distributions from your savings accounts. The general rule is to draw from taxable accounts first. If you sell stocks held longer than a year, you pay tax on the profit at the long-term capital-gains rate, up to 20 percent, whereas you’ll pay ordinary income tax of up to 39.6 percent on every dollar you withdraw from pretax accounts, unless Congress changes the tax rules. If you withdraw from a pretax account before age 59½, you may have to pay a 10-percent penalty on earnings on top of taxes due on the distribution itself. (There’s no penalty on distributions from a 401(k) if you are 55 or older in the year you leave the job.)

After you’ve run the numbers, do a reality check. If there’s a gap between expenses and income, you’ll have to either spend less in retirement or work longer.

“I have clients who look at the results and say, ‘Wow, we’re not ready. We had better make some changes,’” says Derek Tharp, a CFP in Cedar Rapids, Iowa. For others, the analysis comes as welcome news that they can retire on course.

Jane Bennett Clark is a senior editor at Kiplinger’s Personal Finance magazine. Send your questions and comments to moneypower@kiplinger.com.