Couple making plans for spending and saving in retirement.

When should you start spending retirement savings?

Retirement income planning and spending depends in large part on the accounts you have, the goals you've set and the timing you put in place.

Saving for retirement requires decades of hard work and discipline. When it's time to finally spend those savings, some people find it difficult to dip into their accounts. Others simply have questions about retirement income planning and how much they can and should spend.

When should you start spending retirement savings? Follow these tips.

Understand the rules

For many retirement accounts, you must reach the age of 59½ before you can withdraw money from a 401(k), 403(b) or IRA without incurring an early withdrawal penalty. And most of these retirement accounts require you to start making required minimum withdrawals when you reach the age of 73, even if you're still working. These rules can help you begin to develop a plan for withdrawing money from your retirement accounts.

Set some goals

Spending and saving for retirement go hand in hand, and of course the later you start withdrawing, you're likely to have  more on hand to spend. For example, if you continue working, even part time, you may be able to gain flexibility with retirement income planning and spending guidelines. According to the 4 percent rule, a 65-year-old with $1 million in a diversified retirement account can expect to be able to withdraw $40,000 a year (adjusted for inflation) over 30 years. However, there are a variety of calculators and approaches to retirement that can help you evaluate your own spending and goals.

Plan for taxes

When you start spending from retirement accounts, you also need to plan for how taxes may affect that rate of withdrawal. Taxes and tax exemptions vary on the type of retirement account. For example, distributions from Roth IRAs are generally tax-free. The capital gains tax rate on other investments such as stocks or mutual funds may vary based on the account that they're in. Talk with your financial consultant and tax adviser regularly about balancing tax needs and setting up proportional withdrawals, which are taken from each account based on that account's percentage of your overall retirement savings.

Reconsider the "when" of Social Security

The earliest a person can start collecting Social Security is age 62, but if you hold off, monthly benefits will continue to go up until you reach the age of 70. Because of this, some advisers suggest that it's better to spend from other retirement savings first in order to maximize the guaranteed income from Social Security later on.

Plan, reevaluate and replan

When you've spent 30 or 40 years slowly building up your retirement savings, it can be a shock to see the balance take a dip once you begin withdrawing in order to fund retirement. That can lead to fear of running out of money early, which might even tempt you to forgo a long-awaited experience like a cruise or a trip. But the reality is that most people actually spend less money as they age, not more. Make a plan for your spending and then reassess goals, taxes and accounts, and adjust as needed.

The information in this article was obtained from various sources not associated with State Farm® (including State Farm Mutual Automobile Insurance Company and its subsidiaries and affiliates). While we believe it to be reliable and accurate, we do not warrant the accuracy or reliability of the information. State Farm is not responsible for, and does not endorse or approve, either implicitly or explicitly, the content of any third party sites that might be hyperlinked from this page. The information is not intended to replace manuals, instructions or information provided by a manufacturer or the advice of a qualified professional, or to affect coverage under any applicable insurance policy. These suggestions are not a complete list of every loss control measure. State Farm makes no guarantees of results from use of this information.

Neither State Farm nor its agents provide tax or legal advice.

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