Do you have a spending plan in place for when you retire? Many retirees worry about outliving their money. It’s important to have a strategy for withdrawing and using your retirement assets.
First, you’ll need to determine a practical, yearly withdrawal amount. Some households adopt the 4% rule, which entails removing 4% from their savings annually. That rule, however, has its critics, many of whom feel it can backfire in a volatile market. Some retirees try to withdraw a set dollar amount annually. Others withdraw a fixed percentage of their portfolio or aim to live off its interest rather than its principal. There is also the “bucket” approach, in which a retiree withdraws cash to live on from an account that would be “refilled” with investment earnings from other accounts.
Second, keep in mind the order in which you withdraw from your accounts. It may be preferable to withdraw income from your taxable investment accounts first. That way, you can give your tax-deferred accounts a chance to grow and compound further. Generally, withdrawals from tax-deferred retirement accounts are required at age 73. Because the taxable income resulting from these mandatory withdrawals may put you in a higher tax bracket, one option is to start allowing withdrawals from these accounts earlier (after age 59 1/2) — the smaller the account balance, the smaller the mandatory withdrawal becomes.
As your retirement progresses, you’ll want to review your strategy. Life events, investment returns, inflation and other factors may call for adjustments. The key is to have a plan in place that you can then modify as needed.
This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal.
This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.
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