Retiring with under $1 million? 8 ways to stretch your savings

Approaching retirement without having amassed $1 million does not mean leaving the workforce is off the table. Savers with a six-figure nest egg can still improve their odds of making the money last by following a few key financial do's and don'ts.

Start by figuring out how much income you will actually need in retirement, not just how much you have saved. Remember that spending often falls as people get older. Social Security should be treated as an inflation-adjusted lifetime income source, along with any pension income you may have.

Avoid relying only on interest and dividends to cover your spending. Doing so can weaken returns and remove some inflation protection. A better approach is to hold a diversified mix of stocks and bonds, draw some money from capital gains, and keep a cushion for rising prices.

If your savings do not fully bridge the gap between Social Security and your spending needs, you may want to consider downsizing your home, using a reverse mortgage, or working part time. Those still in full-time jobs can also increase retirement-plan contributions.

It is wise to consult a qualified financial adviser who can run the numbers and estimate your chances of success.

To guard against major financial shocks, consider health insurance if you are not yet eligible for Medicare, long-term-care coverage and umbrella insurance. You should also review your estate plan with an attorney and make sure you have an emergency fund equal to at least three to six months of living expenses.

If you claim Social Security and keep working part time or full time, your benefit may be reduced. For people younger than full retirement age, benefits are cut by $1 for every $2 earned above $24,480.

It is usually better to wait to claim benefits until you are sure you will not face a reduction. If you delay claiming past age 67, your benefit can rise by 8% a year to 124% of your standard monthly payment. Consider the impact carefully.

Roth conversions can be a valuable tool in the years between retirement and required minimum distributions. An accountant or adviser can help determine how much to convert each year in order to manage taxes efficiently.

Converting too much can push you into higher tax brackets before RMDs begin. That may leave you paying too little or no tax later, but it can also increase your total lifetime tax bill and accelerate payments unnecessarily.

As taxable income climbs, Medicare premiums can rise too. For instance, a single filer with modified adjusted gross income of $109,000 pays the standard Part B premium of $202.90 a month. If income rises by just one dollar to $109,001, the monthly premium increases to $284.10.

One of the most important steps for financial security is avoiding credit card debt, since its interest rates are high and not tax-deductible. Paying the balance in full each month is the safest habit.

The size and structure of your debts, including car loans, leases, mortgage debt and home equity loans, can have a major effect on retirement finances. It is worth comparing interest rates with the opportunity cost of paying them off early.

Running your retirement plan under different assumptions can lead to better decisions about everyday spending and about adjustments if circumstances change, such as a spouse's death or a move to a new residence.

Your plan should also be revisited after major life or financial changes, including tax-law changes or receiving an inheritance.

Long-term financial security depends more on purchasing power than on the size of your portfolio. Inflation can raise the cost of healthcare, groceries, entertainment and rent, while fixed mortgage payments are unaffected.

For that reason, portfolio withdrawals may need to rise each year even if your lifestyle does not change. You can help manage that by making your investments and withdrawals tax-efficient and by keeping spending flexible, especially during periods of high inflation or weak market performance.

This article was provided to The Associated Press by Morningstar. For more retirement content, go to https://www.morningstar.com/retirement.

Sheryl Rowling, CPA, is an editorial director and financial adviser for Morningstar.

Related Links:

Morningstar: How To Make Your Money Last in Retirement

Morningstar: Your Retirement Countdown, With Christine Benz

Morningstar: Retirement Planning for Real Life