Saving money for your retirement is only one part of guaranteeing you have a financially secure future. The other part is about making smart decisions on withdrawing your cash.
Experts say there are numerous retirement strategies that you can use to stretch your money further for a longer retirement. Current conditions, the tax rates and your expected longevity are all issues that must be considered.
Rather than choose one method to use through your retirement, talking to a financial advisor about the following retirement strategies might be a great idea.
1 — Use the 4% Rule
This rule says that withdrawing 4% from your retirement in your first year, and then doing inflation-adjusted withdrawals each year afterword, should guarantee your money is there to go through a 30-year retirement.
While this concept is good in theory, the right percentage for you should be customized for your current age and life expectancy.
I have heard levels as high as 10% or 15% of portfolios. However, taking that much out is risky and might deplete your account well before your retirement ends. Even 4% might be high. It is recommended that you do a 2% to 3% withdrawal to be more prudent.
2 — Fixed Dollar Withdrawals
Some seniors use their retirement accounts as though they were piggy banks, withdrawing their money whenever they need it. However, a better approach is to make routine withdrawals of the same total each month or quarter. Of these, monthly distributions usually make the most sense.
Some mutual funds or annuities promise routine payments of a certain amount. And retirees could also decide to withdrawal any chosen amount from their own funds.
This strategy can give reliable income during retirement, but you must take into account your fund’s performance when you decide which amount to take.
3 — Limit Your Withdrawals to Income
Another way to work with your retirement fund distribution is to restrict your withdrawals to income produced by your investments. That means only withdrawing dividends and interest every year but leaving your principal intact.
This method protects an account from running dry since the principal is not touched. However, the downside is that yearly income might be unpredictable. Also, unless the amount is large, it might be hard to live on just dividends alone.
4 — Consider The Total Return Approach
While restricting withdrawals to income seems safe, it might not be practical for you. The next generation of retirees must be comfortable withdrawing some of their principal.
That is usually done with a total return strategy that takes into account the interest, dividends, principal and growth for purposes of doing systematic withdrawals. And these withdrawals are usually used to form a predictable paycheck every month due to the 4% rule or a close percentage of the overall fund.
Although distributions from a retirement account might equal the same percentage every month, the source of your money can vary. A financial advisor can aid you in determining which funds to withdraw your money from, based on the fund performance, and then rebalance your portfolio as needed.
Author: Steven Sinclaire