The Power of Patiently Waiting: A Guide to Retirement Savings for Gen X
As Gen Xers turn 59 and a half, they may be tempted to withdraw funds from their 401(k)s and IRAs without paying the 10% early withdrawal penalty. However, financial advisors warn that it’s usually better to wait than to tap into savings right away. In this article, we’ll explore the importance of patient planning and strategic withdrawals for a successful retirement.
Understanding Life Expectancy
The average lifespan for Americans is around 73 years for men and 79 for women. Financial advisors often model life expectancy for their clients much longer than that. Considering a 15-year period of expenses, tapping into accounts at 59 and a half can significantly reduce total savings and decimate compounding returns.
The Risks of Premature Withdrawals
Just because you can tap into your retirement accounts without penalty doesn’t mean you should. "Almost all of my clients are Gen X and absolutely none of them are in a position to retire or take funds from retirement accounts," says Liz Windisch, a Denver-based certified financial planner (CFP). "My advice to them is to not take any distributions at this time and to wait as long as possible."
Timing is Everything
When to take distributions from retirement accounts is a complicated question that varies for every individual and family. Factors to consider include thinking through when you will take Social Security, how you will pay for Medicare, and your cash flow needs now and in the future. "Before thinking about making distributions from retirement accounts, it’s important to build out a cash flow plan for the next 15 years," says Stephen Maggard, a South Carolina-based CFP.
The 15-Year Plan
Many advisors recommend drawing from taxable accounts first, followed by tax-free, or Roth accounts, next, and tax-deferred last (that said, tax-deferred and tax-free can be swapped, depending on your personal situation). This strategic approach can help maximize your savings and minimize taxes.
The Reality Check: Gen X’s Retirement Savings
It’s especially important to be prudent for a generation that isn’t necessarily ready for retirement. Research has found that Gen X falls far short of recommended savings amounts. Factors contributing to this include having to save on their own for retirement, limited access to private pension plans, higher student loan debt, and a cost-of-living crisis.
Catch-up Contributions and Roth Conversions
One way Gen X can better prepare for retirement is to take advantage of catch-up contributions. Those aged 50 or older can save more in their tax-advantaged savings accounts than younger investors. Another tip is to focus on tax reduction by considering Roth conversions. This can help minimize taxes in retirement and ensure a more secure financial future.
Conclusion
Gen Xers, don’t be tempted to rush into retirement just because you can. With patience, strategic planning, and the right financial advice, you can create a secure and comfortable retirement. Remember to focus on building a cash flow plan, maximizing your savings, and minimizing taxes. By doing so, you’ll be well-prepared for the years ahead.
FAQs
Q: Why should I wait to withdraw from my retirement accounts?
A: Tapping into accounts at 59 and a half can significantly reduce total savings and decimate compounding returns.
Q: What factors should I consider when deciding when to take distributions from retirement accounts?
A: Factors to consider include thinking through when you will take Social Security, how you will pay for Medicare, and your cash flow needs now and in the future.
Q: What is the average lifespan for Americans?
A: The average lifespan for Americans is around 73 years for men and 79 for women.
Q: What is the importance of tax reduction in retirement planning?
A: Focusing on tax reduction can help minimize taxes in retirement and ensure a more secure financial future.
Q: What is a Roth conversion?
A: A Roth conversion is the process of moving funds from a pretax vehicle to a post-tax vehicle, allowing you to pay taxes on the money you convert at your tax rate at the time of conversion, and then it will grow tax-free thereafter.
Q: How can I maximize my retirement savings?
A: Consider taking advantage of catch-up contributions, focusing on tax reduction, and drawing from taxable accounts first, followed by tax-free, or Roth accounts, next, and tax-deferred last.
Author: fortune.com
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