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If you're in your 70s, chances are you're a few years into retirement. For many people, this is a time of transition where the first few years of retirement are behind you, and now it's time to ensure you have a long-term retirement plan for the future.
Dave Ramsey, a well-known personal finance expert, best-selling author, and founder of Ramsey Solutions, has a few suggestions and reminders for people in their 70s. First, he cautions people that if they miss important RMD deadlines, there could be significant financial penalties. Secondly, he proposes an 8% withdrawal rate, but his take is controversial.
RMDs from traditional 401(k)s are mandatory and taxable
If you have a 401(k), Ramsey reminds people in their 70s that at age 73, you are required by law to make a withdrawal from your retirement account. If you don't, there is a penalty of 25% of your RMD amount, which can be substantial. If you want to avoid paying this penalty, make a note of your RMD deadlines and speak with an accountant or a financial advisor if you're unsure about the process.
401(k) withdrawals may lead to a tax surprise
People in their 70s should be aware that 401(k) withdrawals are treated as ordinary income. If you make a large withdrawal, it can push you into a higher tax bracket, which is a surprise no one wants during tax time. Being in a higher tax bracket can have even more consequences for retirees. For example, it's possible that higher income can increase Medicare IRMAA surcharges and make more of their Social Security benefits taxable.
Ramsey's withdrawal rate advice draws criticism
Your withdrawal rate as a retiree is an important consideration because you need to strike a balance between having enough money to live on and having enough money in your accounts to last into the future. When Ramsey said he's comfortable with an 8% withdrawal rate, it drew criticism from many people in the finance community, as many people adhere to the 4% rule. However, others agreed with him, saying it was possible under certain market conditions. Ultimately, the withdrawal rate that's best for you will depend on your risk tolerance, the size of your nest egg, and your age. Withdrawal rates are not a one-size-fits-all approach.
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Ramsey is adamantly against debt
Another key principle that Ramsey teaches is to become debt-free and remain that way. Not only does he recommend that everyone should become debt-free before investing, but he also encourages people to be completely debt-free, including their mortgage, before retirement. He teaches something called the 7 Baby Steps to his listeners, which gives people step-by-step advice on how to become debt-free, start investing, and build wealth. Being debt-free can be especially beneficial to those in their 70s who are living on a fixed income, as debt payments, like car notes, can impact cash flow and give you less money to live on during your golden years.
Ramsey prefers investing in Roth IRAs
Although Ramsey tells his listeners to invest in their 401(k)s and take advantage of their company matches, he prefers investing in Roth IRAs. That's because you'll contribute to a Roth IRA with after-tax money, meaning you can withdraw from your accounts tax-free in retirement. Roth IRAs also have more freedom when it comes to withdrawals, because there are no RMDs, so you don't have to worry about RMD penalties.
An emergency fund can help preserve your nest egg
Ramsey recommends that his listeners have a solid emergency fund with three to six months of expenses in it. This can be helpful for retirees in their 70s, especially during down market years. An emergency fund can help pay for a car repair or an unexpected home maintenance issue without you having to withdraw more money from your retirement account.
People in their 70s still need to have a financial plan
Even though many people in their 70s are enjoying their retirement years after decades of work, they still need a financial plan. Managing RMDs, understanding Medicare IRMAA thresholds, and considering options like qualified charitable distributions (QCDs) to reduce tax liability all take time to understand and plan for. If you're not sure whether or not you're on the right track in retirement or have tax questions, consult with a financial planner or an accountant. They can review your personal finances and take time to understand your goals to help ensure you're on the right track.
Why Dave Ramsey has millions of followers
Although Dave Ramsey has his critics, he also has millions of followers who avidly listen to his radio show and podcast every day. What attracts many people to his teachings is his no-nonsense approach to finances. He can be harsh with some callers, but he also admits to the mistakes he's made in his life. During times of turbulence or market challenges, it can be helpful to have someone with a direct approach and a clear financial plan, and that is what Ramsey delivers.
Bottom line
Ultimately, people in their 70s deserve to enjoy a stress-free retirement, especially after years of working and contributing to retirement accounts. However, being retired also means committing to a financial plan, including making a withdrawal strategy that works for you and asking for help when you need it.
