When is it time to withdraw?
You've saved for years — what you need now is a strategy for making the most of your nest egg in retirement. Here's why.
As you near retirement, you'll likely take on a startling new mind-set: After years of socking money away, you'll begin strategizing about how best to tap into those funds to use as income. Not only that, but you may want to make sure your money lasts for another 30 years (and maybe longer).1
For some people, the transition can be daunting — especially in today's challenging economic environment.
"In my parents' day, the defined benefit pension plan used to be the norm," says Randy Long, managing principal of SageView Advisory Group in Irvine, CA.
But it's not so simple today, Long says. "Retirees need to use a 'multi strategy' with regard to their distributions," he says. "And they will need help, guidelines and tools to manage their funds."
Weigh your options.
A financial professional may suggest you consider general approaches to disbursements and retirement income, such as:
- Systematic withdrawal. This strategy looks at your nest egg in its entirety and allocates a percentage of the portfolio's total value — calculations from the Principal Financial Group® show 4 to 5 percent per year1 — to the retiree as income, while the balance continues to be invested and potentially grow.
- The bucket approach. This strategy segments the retirement funds in your portfolio according to your income goals at a particular point in time and the risk level of the funds. For example, in the early years of retirement, you may want a large portion of your income to go toward travel, and this bucket would be managed to support that goal. Then the bucket for later years may be managed to help align income with medical expenses.
These strategies — like inflation and the economic environment — aren't stagnant, however. You'll need to stay diligent about reassessing and adjusting your approach to help make sure it continues to support your needs and goals. A financial professional can help you with this.
Choose when to withdraw funds.
Deciding when to take certain distributions can be tricky because so many factors come into play.
"To determine this, we need to really look at the retirees' situation. We'll consider such factors as how much they've accumulated, their health, their tax bracket and what types of expenses they have," says Long. "Then we look at their available health insurance, pensions, investments, housing situation — everything."
Some accounts help make the decision for you, with required minimum distributions (RMDs). For example, traditional IRAs require the owner to start taking distributions by age 70 1/2 (owners of Roth IRAs do not have RMDs.) Employer-sponsored retirement plans also have this provision.2
Retirees typically take distributions from some of their accounts before the RMD is in effect, but timing is always a consideration. Waiting until age 70 to take Social Security benefits means the amount you receive on a monthly basis could be as much as 32 percent greater3 than if you'd started collecting at age 62. Conversely, because RMDs count as taxable income, choosing to take them all at once could create a tax burden.
If you continue working in retirement, that also will impact distribution timing because it prolongs your opportunities to earn and save.
Get the help you need.
Before and during retirement, it's important to rely on the assistance of financial professionals for the discipline of managing retirement funds, says Long.
"You'll have someone who is objective and can help you look at your situation independently," he says. "You may have been good at saving, but you'll need to look at the withdrawal options that are available and develop a long-term investment strategy."
If retirement is still a few years off, use that time to stay committed to building your nest egg, Long says. One opportunity that may be available if you're age 50 or over: You may be able to take advantage of the catch-up contribution feature of your organization's retirement plan. If your plan allows this, you can contribute an additional $5,500 to the plan.4
"Save as much as you can," Long adds. "Everyone needs to save more. At the end of the day, Americans have not accumulated enough."
Get help mapping out your strategy
Don't go it alone when you're planning for retirement. A financial professional can help you determine a strategy for making smart withdrawals from various accounts once you're retired.
Try our retirement calculators to help you plan for what's ahead — determine if you're saving enough and what expenses might be after you retire.
2 IRAs require individuals and qualified retirement plans require highly compensated employees (HCEs) (greater than 5% owners or has earned compensation more than $115,000 in 2013) to receive a minimum distribution by the April 1 following attainment of age 70 1/2 and each December 31 thereafter. For an employee of a qualified retirement plan that is not a HCE, but still actively employed, RMDs can be delayed until April 1 of the year following the year they terminate employment and each December 31 thereafter.
4 Catch-up contributions to the plan, if allowed, can be made once you've met the lesser of the plan's or IRS contribution limit of deferring $17,500 as indexed for the 2013 calendar year.