Like most things in
life, retirement fund withdrawals should be carefully planned to maximize your
assets and get the most mileage from your retirement funds. Of course, the
first act is to view your retirement fund "inventory" to see what your options
are. You may be able to draw from any of the following types of retirement
accounts:
- 401(k) or 403(b)
- Annuities
- Business ownership
- HSAs (health savings accounts)
- IRAs (traditional, Roth, or both)
- Pensions
- Social Security Income (SSI)
- Stock-based compensation
- Taxable investments
Regardless of the types
of retirement funds you have, there are multiple options for withdrawing them
to help you get the highest value from these funds throughout your retirement.
Penalty-free withdrawals
from IRAs and 401(k) / 403(b) accounts begin at the age of 59.5. You do not
want to start withdrawing from these funds before that age, if possible, to
avoid potentially steep penalties. Mandatory withdrawals begin at the age of 70.5.
Roth IRAs are the exception, however, as there are no mandatory withdrawals
until after the account holder's death.
Which
Funds First?
When determining which
of your retirement funds to withdraw first, some aren't up for debate. You must
begin receiving minimum distributions by certain stages of your life. There
are, however, some retirement funds that leave you in the driver's seat for how
you wish to manage your retirement finances.
One of the primary
considerations when determining which retirement funds to utilize or withdraw
first involves taxation. The more you pay in taxes, the less of your money you
get to keep. When funds and opportunities to earn more funds are limited, as
they are in retirement, it is best to adopt a strategy that minimizes your
contributions to Uncle Sam.
The other vital
consideration involves your income needs. It is wise to consider the monthly
income you will require to maintain a particular lifestyle during your
retirement. Once you understand the monthly income you will need to meet those
standards, then you must work out a budget that will create a sustainable
income for you for the duration of your retirement.
However, do not forget
to revisit your strategy each year to determine whether your goals are the
same, your needs are consistent, and the monthly income generated was
sufficient to meet those needs and reach those goals or if more significant
income is required. In other words, you can make changes, to some degree,
throughout retirement to accommodate things like rising health care costs,
increased costs of living, and even decisions to move to areas that have lower
costs of living.
Retirement
Withdrawal Strategies
There are a few commonly
employed retirement withdrawal strategies that serve retirees well, depending
on their financial goals and other considerations. The one that will work best
for you may not be the same one that works best for others. It may even require
some degree of trial and error to decide which strategy you like best.
These are some commonly
used retirement withdrawal strategies you might want to consider.
- The Four Percent Rule. This strategy has you withdrawing four percent
your first year and an additional two percent (to account for inflation)
each year after that. This method gets lauded for its simplicity. It is
equally criticized for being somewhat short-sighted as market volatility
can create a risk for depleting funds too quickly.
- The "Buckets" Strategy. This strategy creates three "buckets," where you
store your holdings. In one bucket, you will have 20 percent of your
savings to serve as living expenses for up to five years. The second
bucket holds "fixed income" securities. The third holds the remaining
assets inequities. Cash removed from the first bucket is replenished from
the remaining two. It offers opportunities for savings to continue growing
throughout your retirement but is much more time-consuming to manage than
other retirement withdrawal strategies.
- Dynamic Withdrawals. With this method, you only withdraw the income
created by your retirement portfolio, leaving the principal untouched to
continue earning and growing your income over time. The major advantage of
this method is that your principal remains largely untouched. However, the
income generated varies from year to year, and inflation may outpace your
withdrawals.
- Fixed Dollar Withdrawals. With this method, you withdraw a fixed amount of
cash each year throughout retirement. That allows for the automatic
withholding of federal taxes and offers a simple method for managing your
money. However, it does not account for inflation over time and may force
you to liquidate more assets to accommodate withdrawals in down markets.
- Fixed Percentage Withdrawals. Another simple strategy to follow is to withdraw a specific percentage each year from your retirement accounts. Unfortunately, it creates some volatility with some years offering more income and others offering less. Additionally, it may require you to deplete your retirement savings too soon.
Takeaway
Some people employ
multiple strategies, mixing and matching as needed to give themselves adequate
income from year to year as expenses (cost of living, medical care, etc.) grow
while helping them to set more money aside to help their money last longer. It
may take a while to find your comfort zone or even work with an expert to find
the best way to put your money to work for the retirement you've dreamed of.
