Let’ssayyou’reoneoftheluckyonesandhaveaccumulated$1millioninyour401(k) retirementaccountafteryearsofworking.But,likemany,maybethepandemichas madeyousecondguessbeingintheofficeandyouremployerispushingolder employeesalong.Soyou’vedecidedtoretire.
Howcanyousafelywithdrawthe$1millionandnotrunoutofmoneybeforeyoudie?
You’reprobablyconsideringtwomainoptions:Liveforthemomentandcashoutthe moneyasneeded,orcutbackandconservetoensureitlastsfortherestofyourand yourpartner’slife.Bothdecisionsarewrong.
BeforeItellyouwhattodo,rememberthatthismoneymanagementproblemis uniquelyAmerican.Otherrichnationsdon’trequiretheirelderstomakehigh-stakes, complexfinancialdecisions.Todoitrightyouneedtomakeassumptionsaboutwhen youandyourspousewilldieandhowfinancialmarketswillfare.Nowonderresearch showseldersarelessdepressedhavingaguaranteedstreamofincomeworth$1 millionthanhaving$1milliontomanage.
Butlet’ssayyouaren’tthetypicalAmerican.Notonlydoyouhave$1million,butyou beatthe30%chanceofbeingincognitivedeclineafterage70andthe35%riskof Alzheimer’safterage85.Andyouwereabletoevadefinancialpredation,though peopleover80experiencethehighestaveragelosstofinancialfraudofanyagegroup.
Thestandardruleofthumbhasgenerallybeentodrawdown4%ofyourtotalassets everyyear.Formanyyears,financialplannersuseda1994studyshowing4%wasasafe withdrawalrateifyouhadaconservativeportfoliowithlowfeesandwantedacushion fortheworst-casescenario.
Itwaswonderfultohaveonespecificnumber;itgaveretireessomeconfidenceinthe abyssoftheunknown.
Butnow,theonlyrealruleisthatblindlystickingwith4%isdangerous.Mostexperts agreeit’snolongersafetojustassumethesamehistoricreturnsforstocksandbonds, so3%or3.5%withdrawalratesmightbebetter.Futureinflation,especiallyforout-ofpockethealth-carecosts,mayalsomakethe4%withdrawalratetoohigh.Still,there maybeothersforwhom3%istoolow noonewantstodiepoorwith$25,000ina shoe.
Someadviserslikeannuities,butprivateannuitymarketsaretricky.Thebestannuityis todelayclaimingSocialSecurityevenifyouhavetotapintoyourretirementassets. SocialSecurityisinflation-indexed(agreatdealinthefaceoffuturepricehikes)and thepaymentslastuntiltheendofyourandyourspouses’lives.
TappingintoretirementassetsanddelayingSocialSecuritycanresultinanannual8% increaseininflation-indexedSocialSecuritybenefits.Ifyouwaituntil,say70,you’ll havemoreSocialSecurityincome thenyoucanwithdrawcloserto5%andliveitup alittlebecauseyou’llhavefeweryearstodrawtheassetsdown.
Ifyoureallywantsomekindofguidanceonhowmuchtowithdraw,BostonCollege retirementeconomistAliciaMunnellsuggestsfollowingtheInternalRevenueService’s requiredminimumdistributions(RMD)rule.TheIRSrequiresyoutostarttakingyour taxdeferredretirementmoneyoutattheageof72(or70.5ifyouwerebornbeforeJuly 1,1949).Atage72,theIRSrequiresyoutowithdrawabout3.9%andatage90theRMD is8.8%.
Congresswantsyoutospenditwhileyou’realive,sincethetaxbreakwasn’tintended foryourheirs.What’sbrilliantabouttheIRSRMDminimumdistributionsruleisthatit adjuststheamountaccordingtoyourlifeexpectancy.Themathisdoneforyouandthe requiredminimumdistributionisautomatic.
Finally,whileitmayfeeloverwhelmingtofigureouthowtomakeyour$1millionlast, it’safortunateproblemtohave.Themedianwealthforpeopleinthebottomhalfofthe wealthdistributionisabout$300,000,withmostofthattiedupinahouse.Ifthehouse weresoldandtheold4%rulewereapplied,retireeswouldtypicallywindupwith $1,600amonthfortherestoftheirlivesassumingaveragelifeexpectancy andthey stillwouldhavetopayrent.Clearly,theAmericansystemneedsareboot.
Retirement Planning Retirement Plans Written by Timothy Lofton64 Followers
Timothy Lofton is a Senior Executive and Dynamic Leader with a proven track record of driving business growth. Check out TimothyPLofton.net for even more!
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