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A large number of American workers closing in on retirement are showing anxiety not just over how much theyve saved but also over how to manage their different income sources during their post-career lives.

A new study by Charles Schwab found that most pre-retireesdefined as those within five years of retirementhave at least one fear about their income in retirement. The findings were gleaned from a survey last summer of 1,000 Americans aged 55 and older with $100,000 or more in investable assets, half of whom fell into the pre-retiree cohort.

Seventy-two percent of the studys 500 pre-retiree respondents said they are worried about running out of money after they retire. Thats the most popular worry, but its not the only: 64% say they are overwhelmed by not being able to maintain their current lifestyle or quality of life after they retire, while 60% worry about not getting a regular paycheck in retirement.

We talk a lot about investors saving for retirement, but that transition to retirement and that time right before retirement is often the most stressful, says Rob Williams, vice president of financial planning, retirement income, and wealth management at Schwabs research arm.

Thats because there are so many moving parts and there are so many pieces, he adds.

While knowledge wont solve every retirement problem, understanding the rules and how theyll affect you can save you some stressand moneyas you prepare to retire. These are the two most common pre-retiree income blindspots, according to the Schwab survey.

Taxes

Of the pre-retirees Schwab surveyed, 70% said they knew nothing or not a lot about the tax implications of retirement withdrawals. Thats a problem since traditional individual retirement accounts are tax-deferred, not tax-free, Williams adds.

Contributions to a traditional IRA or 401(k) are pre-tax, meaning investors can use the accounts to shrink their annual taxable income and benefit from returns generated by pre-tax income.

But its important to remember that the investments you make in your traditional IRA or 401(k) arent tax-free forever. Investors must pay income tax once the money is withdrawn. (This doesnt apply to Roth IRAs, which are post-tax investment accounts.)

Because traditional IRA distributions help determine ones tax bracket, many retirees plan their distributions to minimize their tax bill using tools like charitable contributions or Roth conversions. To start estimating how IRA withdrawals could affect your tax bill, you should have a plan for when you will retire and how much you can sustainably withdraw. A common rule of thumb suggests retirees can sustainably withdraw 4% to 5% of their retirement accounts each year, though investors should research the best approach for their particular circumstances.

Required Minimum Distributions

Seventy percent of those Schwab surveyed said they knew little or nothing about annual required minimum distributions, or RMDs, from tax-deferred accounts. That could lead to an unwanted surprise after their 72nd birthdays, when retirees are obligated to start taking RMDs. (That age is up from 70.5 thanks to a recent change in the Secure Act.)

While the amount any retiree must withdraw from their taxable IRA varies based on IRS calculations, the penalty for failure to withdraw it is the same. The 50% fee on the unwithdrawn RMD amount is one of the largest fees I can think of, other than, I suppose, breaking the law, Williams says. You can estimate your RMD on Schwabs website.While retirees must start withdrawing from taxable accounts at age 72, that timing isnt perfect for everyone, Williams says. There are plenty of strategies for managing RMD income you dont needsuch as Roth IRA conversions or qualified charitable donationsbut Williams recommends speaking to an advisor for a personally tailored RMD plan.

Write toShaina Mishkin atshaina.mishkin@dowjones.com

Original post:
Seniors Are Stressed About Income in Retirement. What To Do. - Barron's