When you retire, which you can do as early as 59½, you have the privilege to start making withdrawals from your retirement accounts. The more accounts you have earning interest, the more it matters how you withdraw your money.
The sequence and the source of your withdrawals from all accounts will determine how long your money will last. Following an unplanned method could mean using your money up years before you die, but strategic planning could make it last your lifetime—and longer.
Your Goals Will Help Determine Investments
When you make your retirement plans, you may decide to move, travel, develop new hobbies, and other things that may be costly. These plans mean you will likely need more money early in retirement. The need for money may help determine some of your investment strategies and withdrawals.Annuities
Annuities can be an excellent way to get a consistent source of income for a long time. Although the income will be regular, accessing more money from an annuity may be difficult. Annuities come in different forms—such as with fixed interest or adjustable rates based on the market.One with a fixed interest rate will continue to give you interest no matter what happens in the market. Interest rates in annuities, FisherInvestments says, are generally lower than market rates.
401(k) and IRA Withdrawals
Withdrawals from retirement accounts, such as 401(k)s and IRAs, must begin when you turn 73. They can be made annually or monthly, depending on your need. If you only need an annual withdrawal, your money will earn more if you withdraw near the end of the year, which gives your money time to grow more interest. You will also have to pay taxes on your withdrawals.You do not want to miss a required minimum distribution (RMD). If you do, there is a penalty of 25 percent of the money you should have withdrawn, and you will also need to pay taxes on the money. SmartAsset reports that this fine can be reduced to 10 percent if you correct it within two years.
A strategy to keep more of your money during your retirement years is to roll over some of your money from 401(k)s or IRAs into Roth accounts. When you do, you must pay taxes on the rolled-over amount, but Roth accounts do not have RMDs. You can access the money in those accounts when you need to—or let it grow.
Money in Roth accounts must stay in the accounts for at least five years before you can withdraw it without a penalty. This rule applies to each Roth account.
The 4 Percent Withdrawal Strategy
One of the most common withdrawal strategies is the 4 percent guideline. Fool says this strategy involves withdrawing 4 percent of your retirement account balance in the first year. In the following year, you would withdraw the 4 percent plus an amount equal to the year’s inflation rate.
A potential problem with this strategy is that when it was first made, interest rates were more stable than they are now. Following the 4 percent guideline may cause issues and reduce your overall amount—which could mean running out of money earlier than expected—if some years have lower-than-expected market performance.
Instead, you could use the 4 percent guideline in years when the market performs well and use a smaller percentage when it does not. You might need to settle for 3.5 percent or 3.7 percent (or less) during those years. Bankrate mentions that when there are high stock market valuations and low interest rates, your money may not last for 30 years.
The Bucket Strategy of Withdrawals
The bucket strategy divides your retirement savings into three buckets: short-term, intermediate-term, and long-term. These buckets cover periods in your life that are likely to require different amounts of income. The short-term bucket covers the first five years, the intermediate-term bucket covers the following five years, and the long-term bucket covers anything after the first ten years.The money in each bucket can be put into different investments based on the number of years. Vanguard suggests placing money in the short-term bucket into liquid assets, lower-risk cash equivalents, and short-term bonds.
Money in the intermediate-term bucket can go into high-quality bonds and stocks, real estate investment trusts (REITs), and utilities. Cash in the long-term bucket can go into long-term bonds and stocks.
The Dynamic Withdrawal Strategy
When you start the dynamic withdrawal strategy, you calculate what you need as a minimum each month and a maximum that you will withdraw. When the market performs well, you can withdraw more but stay under your ceiling. When the market performs poorly, you take out less—but never lower than your minimum.Determining Your Strategy
Before you choose a strategy to take out retirement withdrawals, take inventory of all your potential sources of income during retirement. Next, calculate how much money you need after taking out your RMDs—unless you want to wait until you are 73. Taking some money out early from your retirement accounts enables you to pay less taxes because it will put you into higher tax brackets later as it grows.Once you take out your RMDs, go after your dividends and interest. Capital gains rates are less when you have held those assets for more than a year. As bonds or CDs mature, cash them. Schwab mentions that when you let them mature, you will not owe taxes on the principal. After that, if you still need money, sell more of your assets.
Waiting until you turn 70 to take Social Security will give you the most money. This strategy also enables you to need less money from other sources during retirement.
When you make your retirement plans, get information that best fits your situation from a financial advisor or estate planning lawyer. They can help you create a strategic plan for a more comfortable retirement.
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