In “A Tale of Two Cities,” Charles Dickens wrote, “It was the best of times, it was the worst of times.” When it comes to the markets, we believe that kind of describes the past seven years. On one hand, U.S. stocks have experienced a multi-bull run period. On the other, many potential investors were in recovery mode for their careers, real estate and assets, and didn’t participate in it.
Even those who saved up a tidy little nest egg may be concerned about not having enough money for the future. What’s a retiree to do? The following are some retirement income strategies to consider:1
Until recently, the “4% rule” was a widely followed practice for withdrawals. The idea was a retiree with a balanced investment portfolio could pull out 4 percent of his or her assets during each year of retirement, along with a corresponding annual inflation adjustment. However, the 4 percent figure is no longer the most accurate. You must also make adjustments for inflation and perhaps tighten the belt where cost of living increases are concerned.
Another strategy is to adjust your withdrawal rate each year based on asset performance. For example, if you experience a down year, withdraw an amount closer to 3 percent. Clearly this may be difficult, but if the alternative is running out of money too soon, that should be sufficient motivation.
If you’re a long-term planner, the U-Shape withdrawal strategy may appeal. This strategy assumes you’ll spend more early on in retirement — traveling, splurging and freely enjoying yourself where spending is concerned. But eventually, you set a date when you cut back and settle into a more normal routine. During the later years of retirement, when health and long-term care expenses tend to increase, plan to withdraw more.
The tax-efficient strategy is designed to always keep you in the lowest tax bracket possible. This means you might spend down taxable assets first, then 401(k) and conventional IRA assets and finally non-taxable Roth IRA accounts. If longevity tends to run in your family, you may also want to defer taking Social Security for as long as possible to accrue the largest benefit.
Alternatively, consider spreading your tax liability by taking a little out of each type of account each year. If you withdraw as much as you need and still have room in your tax bracket, consider converting small portions of a traditional IRA into a Roth each year.
Some retirees decide to begin drawing Social Security benefits earlier rather than later to give their tax-deferred investments more time to potentially grow. Once you turn 70 ½, factor in mandatory withdrawals from conventional IRAs, 401(k) plans, 403(b) plans, etc. In this scenario, Roth IRAs don’t require mandatory withdrawals, so that may be the account you tap last for the greatest growth opportunity.
We are able to provide you with information but not guidance or advice related to Social Security benefits. Our firm is not affiliated with the Social Security Administration or any governmental agency.
This content is designed to provide general information on the subjects covered. It is not, however, intended to provide specific legal or tax advice and cannot be used to avoid tax penalties or to promote, market or recommend any tax plan or arrangement. You are encouraged to consult your personal tax advisor or attorney.
1Tom Petrumo. L.A. Times. April 3, 2016. “A guide to drawing down your savings in retirement.” Accessed April 4, 2016.
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