3 Signs You’re Overdrawing Retirement Accounts
After decades of stashing money away and letting it grow in your investment accounts, retirement means it may be time to finally start withdrawing. But while it can be exciting to reap the benefits of your hard work, it’s also important to stick to the plan.
You don’t want to spend a lot of money on your daily expenses, travel and so on and end up living off your nest egg. Spending too much early can slow your retirement path and cause difficult decisions down the road. These are some red flags that you may be withdrawing too much from your retirement accounts.
1. Your withdrawals outpace portfolio growth
The first red flag is if your withdrawal rate exceeds the growth rate of your portfolio. For example, withdrawing 20 percent of your portfolio in one year is not recommended as very few portfolios can deliver returns of more than 20% each year. You may get away with this for one year, but if your withdrawal rate is often higher than your rate of return, it can cause problems in the future.
A general rule of thumb is to stick to a 4% withdrawal rate.
Investing in assets with high growth potential, such as stocks, can increase your overall return, but as your horizon narrows, it often makes sense to take some risk off the table. Stocks are generally considered riskier than bonds.
You can also help reduce anxiety about overspending by saving enough money to cover your living expenses. Financial advisors often recommend people have an emergency fund that will cover three to six months of living expenses, but retirees probably want to increase that to one to two years of living expenses.
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2. Your tax bracket goes up a lot
Many people enter a lower tax bracket in retirement, even if they collect Social Security and a pension. Without a salary, no amount of income can push you into higher tax brackets.
If you end up in a higher tax bracket than you expected, it may be because you’re taking too much money out of your nest egg.
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3. Your balance drops faster than expected
If your balance drops faster than expected, that’s another red flag. Consider whether your balance is dropping quickly because you’re overdrawing.
Stock market corrections may also cause portfolios to lose value. If volatility in the stock market causes your balance to fluctuate, it may make sense to reduce some of your stock exposure, as you don’t want to be forced to sell assets to cover your expenses when your balance is down.
Investors can change and adjust their portfolios each year to ensure proper allocation across stocks, bonds and other assets. Investing in low-risk assets like bonds can reduce your volatility during market corrections.
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