Greetings! I hope that this will find you well and enjoying life.
As we get older, our financial objectives change. For example, as young up-and comers, we tend to focus on saving and investing for retirement. But the closer we get to retirement, the more we need to consider how to preserve the assets we’ve accumulated. And perhaps even more importantly, how to withdraw money from those assets efficiently to both maximize income and still have the potential for continued growth.
A retirement withdrawal plan can have many components, so it may be easiest to start with your “known” sources of income. One of the first things you should do is look to the benefit you expect to receive from Social Security when you retire, which you can view at www.ssa.gov. Next, consider at what age you should begin drawing Social Security benefits. If your spouse should begin drawing earlier or later than you, and if one or both of you can postpone benefits in order to earn delayed retirement credits up to age 70.
Next, figure out how much you can expect to receive, if any, from employer pension and/or defined contribution plans. If you think you might retire early, will your employer offer retirement benefits? Should you consider taking advantage of Internal Revenue Code Section 72 (t) exception for penalty-free early distributions from a qualified retirement account?
Once you start transitioning to retirement, you may want to consider changing your asset allocation to be more aligned with your tolerance for risk and withdrawal timeline. For example, to help preserve your retirement assets, consider conservative holdings. To help you keep pace with the possible rising cost of living throughout your retirement, you may wish to incorporate some moderate holdings. If you are looking for the potential to significantly grow your assets with the risk associated with doing so, you may want to apportion some of your assets to more aggressive holdings. Also consider the merits repositioning some of your assets to financial vehicles, like fixed annuities, that can be better suited to providing a stable retirement income.
Another aspect of your withdrawal plan to consider is taxes. It may be a good idea to prioritize distributions from taxable accounts so that you first pay the lower long-term capital gains tax rate on those funds while enabling tax-deferred funds – subject to ordinary tax rates – the opportunity to grow for as long as possible.
You should also consider an appropriate withdrawal rate from your portfolio. To do this, add up your total annual expenses and subtract your fixed sources of income to determine how much you’ll need to make up the difference. Then divide that amount by the current value of your portfolio to get your annual withdrawal rate, expressed as a percentage. Note that this is merely a rule of thumb and you should re-evaluate this rate each year, as it may need to change based on market performance, your prior year’s expenses, and when you begin taking required minimum distributions from a traditional IRA.
If you have any questions or feel that we can help you in any way with any retirement related matter don’t hesitate to call.
Jeff Christian CFP, CRPC
Excellence is not being the best, it’s doing your best.
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