Smart withdrawal strategies to make your money last
Most retirees are understandably worried about withdrawing their money. But once you’ve successfully built yourself a nest egg, Smart withdrawal strategies can help make your savings last a long time.
Here’s how planning ahead with retirement calculations and using tax-savvy withdrawals can save your portfolio.
Simple calculations behind safe withdrawals
Everyone’s retirement savings plan should be different for their specific financial situation, but the 4% rule can be used to get a sense of how much you need for retirement. Retirees using this model withdraw 4% from their portfolio in their first year of retirement to cover expenses, then adjust that amount 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 example, if you spend $50,000 a year, you’ll need about a $1.25 million portfolio for retirement (4% of $1.25 million is $50,000). But remember that your spending money can change in retirement.
A rising stock market can grow your portfolio and give you more flexibility to use. But you also want to make sure you have enough money saved up so you don’t need to sell during a market downturn.
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Strategic withdrawals from accounts
It is important to consider the tax implications when choosing which withdrawal accounts, as there are significant differences:
- Tax Trading Accounts: Accounts funded with after-tax dollars; capital gains and dividends are taxed at any applicable tax rate for the year
- Traditional Traditional Account: Accounts funded with pre-tax dollars; Capital gains that are tax-defended are limited and eligible and are not taxed like ordinary capital
- Retirement accounts: Accounts funded with after-tax dollars; There are no taxes on qualified withdrawals or capital gains
Gradually withdrawing money from your traditional retirement accounts can help spread the tax you have to pay over time. You can also check your tax brackets and limit withdrawals from a traditional retirement account when you’re close to being in a higher tax bracket.
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Inflation and RMD
Inflation reduces the purchasing power of idle money, which is why it’s important to grow your portfolio every year. However, you may need to withdraw more money as the cost of products and services rises with inflation. The increase in social security and the payment companies increase their payments can compensate the inflation to some extent.
You should also consider required minimum distributions (RMDs), which start when you turn 73. If you have more money in a traditional retirement account, you may be required to withdraw more than a higher tax bracket. That’s why it can be a good idea to spread withdrawals out over several years to minimize your tax impact.
Roth retirement accounts and taxable accounts do not have RMDs.
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How to prove your future income plan
Online modeling tools and financial planners can help you create a long-term plan to make your money last. In general, using the 4% withdrawal rule and focusing on solid growth instead of taking big risks can help preserve your nest egg – and your lifestyle and legacy.
