7 Ways to Stretch Your Savings in Retirement

Looking back, you may conclude that saving for retirement was the easy part. Making sure your nest egg will last through retirement can be more of a challenge―with less room for error. Here are seven important steps that can help secure your finances throughout retirement.

1. Calculate a safe withdrawal rate

Withdraw too much from savings each year and you may quickly deplete your nest egg. Take out too little, and you may be unnecessarily scrimping on travel or other activities that would enrich your retirement. So, what’s a safe withdrawal rate? Many professional advisors recommend limiting withdrawals to 4% or 5% during first year of retirement, and thereafter adjusting the dollar amount annually by the prior year’s inflation rate. Here’s how that works:

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Let's say as an example, you have $500,000 in savings.

In the first year of retirement, you withdraw 4% of your savings – or $20,000.

Suppose inflation rises by 3% that first year.

You could withdraw an additional $600 ($20,000 x 3%) the following year.

2. Maximize Social Security

You can claim Social Security retirement benefits as early as 62, but your benefit will be up to 30% less than if you waited until your full retirement age, which is 66 to 67 for workers today.

But to get the biggest payout possible, wait until 70 (provided your health and finances permit). Every year you wait to claim Social Security beyond your full retirement age until age 70, your benefit rises 8%. Plus, future cost-of-living adjustments will be based on the larger benefit.

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Fidelity’s benefits estimator

For a 62-year-old single woman, currently earning $80,000 annually and expected to live into her mid-nineties

Claiming Age, Monthly Benefit, Lifetime Benefit

Age 62, earliest she can claim, $1,809, $759,780

Age 67, her full retirement age, $2,584, $930,240

Age 70, qualifies for the maximum monthly benefit, $3,204, $1,038,096

Source: Fidelity.com/mymoneylifestyle/social-security/ (accessed May 2022)

3. Invest to keep up with inflation

Even mild inflation can take a toll on retirees’ purchasing power, particularly over a decades-long retirement. For example, if you spend $70,000 a year on living expenses today and annual inflation averages 2%, you will need $104,016 in 20 years just to maintain your lifestyle.

That’s why even in retirement your portfolio will still need the growth that stocks can provide. Work with an advisor to determine the right asset allocation – mix of stocks, bonds and cash – based on your investment time horizon and risk tolerance.

An advisor can also recommend other investments to hedge against inflation, such as Treasury Inflation Protected Securities (TIPS), commodities, real estate investment trusts and more.

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Average annual U.S. inflation rate

Source: U.S. Federal Reserve

4. Develop a tax strategy

If you’re like many of today’s older workers, much of your savings is in tax-deferred retirement accounts, such as 401(k)s and traditional IRAs.

Once you begin pulling money out of tax-deferred accounts―either in your sixties or when you must start required minimum distributions (RMDs) at age 72―that income will be subject to ordinary income tax. And those withdrawals could push you into a higher tax bracket, cause more of your Social Security benefits to be taxed, or trigger higher Medicare premiums.

That’s why it’s a good idea to work with a tax professional before or early in retirement. The goal is to develop a withdrawal strategy that minimizes your taxes and extends your savings by considering all your accounts.

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Tax Rates 2022, Taxable Income (Single), Taxable Income (Married filing jointly)

10%, Up to $10,275, Up to $20,550

12%, $10,276 to $41,775, $20,551 to $83,550

22%, $41,776 to $89,075, $83,551 to $178,150

24%, $89,076 to $170,050, $178,151 to $340,100

32%, $170,051 to $215,950, $340,101 to $431,900

35%, $215,951 to $539,900, $431,901 to $647,850

37%, More than $539,900, More than $647,850

Source: U.S. Internal Revenue Service

5. Plan for healthcare costs

Once you’re eligible for Medicare, the federal program will pick up most of your medical expenses. But you’ll still have cost-sharing, such as co-pays, deductibles and co-insurance, as well as premiums for prescription drug coverage (Medicare Part D) and coverage for doctor visits and outpatient care (Part B). For example, the monthly Part B premium in 2022 for most people is $170.10, but the price gradually rises up to $578.30 for the highest-income households.

Plus, Medicare doesn’t cover routine dental and vision care. You’ll need to pay those expenses out-of-pocket or purchase separate dental and vision insurance policies.

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TIP: Use Fidelity’s healthcare calculator (at communications.Fidelity.com/wi/tools/retirement-health-care) to estimate how much you and a partner could pay for healthcare in retirement. You’ll need to enter your current age, expected longevity and expected retirement age for each person.

6. Consider your long-term care options

You might never need long-term care. But if you do, you should have a plan in place on how to pay for this care because it can quickly drain savings.

Many retirees rely on family for caregiving. Others have sufficient assets to pay for outside care out-of-pocket.

Insurance is another solution. You can purchase a long-term care policy, preferably in your 50s and early 60s when it’s still affordable, and you are healthy enough to qualify for coverage. Or you can buy hybrid life insurance that allows you to tap the death benefit if you need to pay for long-term care, and if not, your heirs will receive the benefit proceeds.

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48% Odds that someone turning age 65 today will need paid long-term care in the future. Although only 24% will need care for longer than two years.

Source: U.S. Department of Health & Human Services

National Median Cost of Care (annual)

Adult day healthcare $20,280

Assisted living $54,000

Home health aide $61,776 (44 hours per week)

Nursing home (semi-private room) $94,900

Nursing home (private room) $108,405

Source: Genworth Cost of Care Survey, 2021

7. Stretch your healthcare dollars with an HSA

If you have a qualified high-deductible health insurance plan, you can pair it with a Health Savings Account that has triple tax benefits. HSA contributions aren’t taxed. The invested money grows tax-sheltered. And withdrawals are tax-free for qualified medical expenses.

The maximum contribution to an HSA in 2022 is $3,650 for an individual health plan ($3,850 for 2023) and $7,300 for family coverage ($7,750 in 2023). Those 55 or older can kick in an extra $1,000 annually. Once you enroll in Medicare, you can no longer contribute to an HSA.

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Tip: Pay current medical bills out of pocket, so your invested HSA has more time to grow. In retirement, you can use tax-free withdrawals to pay for healthcare expenses, including premiums for Medicare Advantage, Medicare Part B and Part D, as well as a portion of the premiums for a qualified long-term care policy. You can also reimburse yourself for those earlier medical bills you paid, so keep your receipts.

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© June 2022, Future US LLC