By John Drachman
As big an effort as advisors make to keep their clients disciplined and focused on making their long-term retirement goals a reality, actually withdrawing the assets correctly at retirement might be an even bigger challenge. Incorrect withdrawal strategies can leave retirement-minded investors in costly sinkholes that can spell “lost opportunity.”
Here are five of the top strategies wealth advisors recommend to clients when it’s time to transition from the accumulation phase of retirement planning to what should be the fun part – withdrawing the assets and spending the money.
- The 4% rule:Essentially, this means withdrawing 4% from a nest egg a year while adjusting for inflation. If done consistently, this strategy should not lower the account’s starting value.Developed by William Bengen CFP®, this method is considered one of the safer annual withdrawal rates after being tested through numerous financial crises, including the Great Depression. While the 4% rule may be a good starting point, Brad Bobb CFP® says it’s not always practical because it assumes that a predictable level of income will be sustainable in an unpredictable world.
- Liquidate accounts in the right order: Spend down your accounts in the right order regardless of whether you’d be taking monies from an IRA, 401(k) or a Roth. While the Roth IRA withdrawal would be tax-free, you may wind up paying more from not having those assets growing in the market. It’s generally better to withdraw from taxable retirement accounts first and leave Roth IRAs alone for as long as possible.
- Think about a Roth conversion: Tax professionals often tell their clients to roll retirement accounts into Roth IRAs, where the magic of tax-free compounded growth can continue. Even though the conversion generally triggers a tax event, once you make the move all the funds grow tax-free and can remain untouched. “If you want to preserve that retirement asset for heirs,” according to IRA guru and author Ed Slott, “it’s a great move because it removes the uncertainty of what future taxes will be. Converting to a Roth is a great thing to do for the next generation.”
- Spend down non-qualified assets first: Do you have any funds from investment portfolios that aren’t part of a qualified retirement plan or tax-deferred annuity? Tapping into those accounts first to reduce your total tax liability is a good idea. This is especially important if you are younger than 72, which is the new, revised IRS age for receiving penalty-free Required Minimum Distributions (RMDs).
- The bucket strategy: Here, you divide up savings into separate account types based on your goals; such as emergency savings, living expenses and long-term savings. “The idea is that you let the aggressive investments continue to grow long-term and don’t count on them to provide your short-term income,” says Jon Beyrer CFP®.
Generic strategies though can only provide general guidelines. Since your withdrawal strategy must meet your specific needs, consider reaching out to a financial professional or tax advisor for help. And, in the meantime, build a retirement balance and tax estimate for yourself toward the end of each year. This way you’ll have more time to ponder withdrawal or conversion strategies that are best for you and your loved ones.
John Drachman is a contributing writer to MyPerfectFinancialAdvisor, the premier matchmaker between investors and advisors .John is an IABC award-winning writer, who applies his 30 years of financial marketing experience toward advancing the dialog between investors and investment professionals.