WITH CAREFUL PLANNING, RETIREMENT ASSETS CAN GO THE DISTANCE
Many Americans work at creating a retirement portfolio they hope will be sufficient to last a lifetime. There are many factors, such as health, life expectancy, and inflation rates that will determine whether your assets will outlive you. The general rule of thumb is that, if you want your portfolio to last, you should start drawing 4% or less of the principal on a yearly basis. You can increase the percentage later to compensate for inflation, but only enough to maintain your current standard of living.
A second way to maximize your assets is to calculate your retirement living expenses for a year, including food, clothing, mortgage/rent payments, health care and an amount for discretionary spending. Then take that yearly sum and multiply it by your anticipated life expectancy. You may want to add a few extra years as a safety buffer. You can then use that dollar value to fund an annuity that will provide for your basic needs over the course of your lifetime. Talk to a financial advisor to determine how to structure an annuity around your needs.
Another idea to contemplate when planning how to spend your retirement assets is determining which accounts, taxable or tax-deferred, you should withdraw from first. Most financial planners agree that you should leave your tax-deferred assets status quo for as long as possible so they can continue to grow and spend your taxable assets first. This is especially important for retired persons who are younger than 59 1/2. In the majority of these cases, prematurely withdrawing from a tax-deferred account (withdrawing before the age of 59 1/2) will result in a 10% IRS penalty in addition to taxes due on the amount withdrawn. You also lose the future tax-deferred or tax-free growth on the money that was withdrawn. Once you have exhausted all taxable assets, then draw from your traditional and non-deductible IRAs and 401(k) accounts. Draw from your Roth IRA and Roth 401(k) accounts last.
As a final consideration, you also need to determine which assets classes you should spend first. The bull and bear still have an influence on your portfolio, just as they did when you were acquiring wealth. Try not to sell stocks in a bear market; draw on your bond accounts instead. When equity markets are running high, that's the best time to sell stocks. Withdraw the cash you need and purchase stock with any excess to realign your portfolio with your original asset allocation plan. Keep in mind that any sale of appreciated stock can trigger a taxable event, so it's a good idea to talk with a tax advisor before you make any move.