Frugal retirees: Go ahead, spend your money
Remember your RMDs
After you pass age 70 ½, the Internal Revenue Service will expect you to cash out a portion of your retirement savings whether you want to or not. Unless you're willing to suffer hefty 50 percent tax penalties, you'll need to take required minimum distributions, or RMDs, from your individual retirement accounts, except for the Roth kind, based on the life expectancy of someone your age. IRS Publication 590 has the details, as well as tables you can use to determine the correct amount.
According to Michael Garry, a CFP professional with Yardley Wealth Management in Newtown, Pa., you're unlikely to deplete your IRAs by taking RMDs if you maintain a reasonably diversified portfolio of 45 percent bonds, 50 percent stocks and 5 percent cash. In fact, he says, your portfolio will probably continue growing.
Since you'll have to take IRA distributions in your 70s anyway, you might want to ask your tax adviser whether it would make sense to withdraw some of that money even earlier in retirement. If you have a big balance in your IRAs, your RMDs could push you into a higher tax bracket. Reducing your IRA balance by starting withdrawals sooner, when your income is likely to be lower, might lessen your future tax burden.