Retiring without $1 million? 8 strategies to stretch your savings

A strong retirement plan depends on income, spending, taxes, and flexibility, not a seven-figure account balance

Money Matters-Six Figure Nest Egg — FILE - A tip jar contains one dollar and five dollar bills, Sept. 6, 2017 in New York.

You may be approaching retirement without having saved $1 million, but that does not mean retirement is out of reach. For people with a six-figure nest egg, these eight financial do’s and don’ts can help savings go further.

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1. Do: Figure out your target

Pay attention to how much money you will need in retirement, not just how much you have already accumulated. Keep in mind that your spending may decline as you get older. Social Security can serve as inflation-adjusted lifetime income, and any pension benefits should be included too.

Avoid relying only on interest and dividends to cover your spending. That approach can restrain returns and leave you exposed to inflation. A diversified portfolio of stocks and bonds, along with some withdrawals from capital gains, can help provide more flexibility and a cushion against rising prices.

If your savings do not fully cover the gap between Social Security and your income needs, consider downsizing, a reverse mortgage, or part-time work. If you are still employed full time, increasing retirement contributions can also help.

A qualified financial adviser can run the numbers and estimate your chances of success.

2. Do: Create a backup plan

Shield yourself from major setbacks by maintaining health insurance if you are not yet eligible for Medicare, along with long-term-care coverage and umbrella insurance. You should also review your estate documents with an attorney. And do not enter retirement without an emergency fund equal to at least three to six months of living expenses.

If you start Social Security while continuing to work part time or full time, your benefits may be reduced. For people younger than full retirement age, benefits are reduced by $1 for every $2 earned above $24,480.

It is usually best to wait until you know your benefits will not be reduced. Delaying beyond age 67 can increase benefits by 8% a year, up to 124% of the standard monthly amount. Consider these questions:

How long are you likely to live? The larger benefit may take years to make up for the checks you would have collected earlier.
How much do you need the money now?
Could claiming benefits interfere with your ability to do Roth conversions?

4. Do: Plan taxes before and during retirement

Roth conversions are a useful tool in the years between retirement and required minimum distributions. An accountant or adviser can help determine how much to convert each year so that you do not:

Move into a higher tax bracket
Convert more than necessary to balance taxes before and after required minimum distributions
Trigger higher Medicare premiums by crossing income thresholds known as income-related monthly adjustment amounts

Converting too much can mean paying too much tax during the years before required minimum distributions begin. That may leave you paying little or no tax later, but it can increase your overall lifetime tax bill and speed up when those taxes are paid.

5. Don’t: Overlook required minimum distributions and Medicare

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

6. Do: Get rid of expensive debt

The smartest move for financial security is to avoid credit card debt because of its high, nondeductible interest rates. Paying the balance in full each month is ideal.

The size and structure of your debts, whether from car loans, leases, a mortgage, or home equity borrowing, can affect retirement in a big way. Review interest rates and weigh the tradeoffs of paying debt down faster.

7. Do: Test and refresh your retirement plan

Running your plan under different scenarios can improve decisions about regular spending and possible adjustments if circumstances change, such as:

Stocks falling 30%
Inflation staying high
One spouse dying early
Long-term care becoming necessary
Social Security being delayed
A major home repair being needed
Retirement lasting into your 90s

Review the plan again after events such as the death of a spouse, moving, tax law changes, or receiving an inheritance.

8. Don’t: Assume six figures is either enough or not enough

Your financial security depends more on purchasing power than on the size of your portfolio. Some expenses, such as healthcare, groceries, entertainment, and rent, tend to rise with inflation. Fixed mortgage payments, however, are not affected by inflation.

That means the amount you need to withdraw from your portfolio will generally rise over time even if your lifestyle does not change. A tax-efficient investment and withdrawal strategy can help. It also helps to keep spending flexible and trim discretionary expenses during periods of high inflation or weak market returns.

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.