Smart Withdrawal Strategies To Make Your Savings Last
Many retirees are understandably worried about outliving their money. But once you’ve successfully built up a nest egg, smart withdrawal strategies can help make your savings last over the long haul.
Here's how planning ahead with retirement calculations and implementing tax-savvy withdrawals can preserve your portfolio.
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The Simple Math Behind Safe Withdrawals
Everyone’s retirement savings plan should be unique to their specific financial situation, but the 4% rule can be used to get a sense of how much money you need to retire. Retirees who use this model withdraw 4% from their portfolio during their first year of retirement to cover expenses, then adjust that amount to account for inflation in subsequent years.
You can determine how much you spend each year to calculate how much you need in your nest egg. For instance, if you spend $50,000 per year, you would need roughly a $1.25 million portfolio to retire (4% of $1.25 million is $50,000). Though keep in mind your spending habits may change when you retire.
A rising stock market can boost your portfolio and give you more flexibility to spend. But you also want to make sure you have enough money saved so that you don't need to sell during a market downturn.
Strategic Withdrawals Across Accounts
It’s important to consider tax implications when choosing which accounts to withdraw from, as there are key differences:
- Taxable brokerage accounts: Accounts funded with after-tax dollars; capital gains and dividends are taxed with any taxes due annually
- Traditional retirement account: Accounts funded with pre-tax dollars; money grows tax-deferred and qualified withdrawals are taxed as ordinary income
- Roth retirement accounts: Accounts are funded with after-tax dollars; no taxes on qualified withdrawals or capital gains
Gradually taking out money from your traditional retirement accounts can help spread out the tax you have to pay over time. You can also check tax brackets and minimize traditional retirement account withdrawals when you are about to cross into a higher tax rate.
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Inflation and RMD Reality
Inflation reduces the purchasing power of idle cash, which is why it is important for your portfolio to grow each year. However, you may need to withdraw more money as the cost of products and services rises with inflation. Increased Social Security paychecks and dividend-paying companies raising their dividend payouts can compensate for inflation to some degree.
You also have to monitor required minimum distributions (RMDs), which start when you turn 73. If you have too much money in a traditional retirement account, you may have to withdraw more than you would like and end up in a higher tax bracket. That’s why it can be a good idea to spread the withdrawals out over several years to minimize your tax impact.
Roth retirement accounts and taxable brokerage accounts do not have RMDs.
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How to Future-Proof Your Income Plan
Online modeling tools and financial planners can assist you in creating a long-term plan to make your money last. In general, using the 4% withdrawal rule and focusing on steady growth instead of taking big risks can help preserve your nest egg — and your lifestyle and legacy.