Most adults know the importance of saving for retirement. It’s really easy. Just set up an automatic withdrawal from each month’s paycheck and direct it into a retirement account. What becomes trickier is the amount we should be saving and how we should best invest it.
But what happens as we enter retirement? We’ve been saving money our entire lives. In theory, we know what’s needed–simply rely on savings, Social Security, and if we have one, a pension. Over the years, I’ve had many clients and colleagues reach out to me as they recognize that the seemingly simple concept of relying on savings really isn’t so simple.
A survey a couple of years ago by the American Institute of CPAs revealed that two prime retirement income planning concerns are (1) running out of money and (2) how to more efficiently and effectively tap into assets. That shouldn’t be a surprise. “How much money do I have to live on each month?” is a common question.
Social Security, a pension, and an annuity are reasonably stable. For most folks, however, it’s not enough to live on, and a lifetime of savings plays a key role in filling the gap.
A lower withdrawal rate will increase the odds the portfolio will last through your retirement years–that’s intuitive. But it also means less discretionary income. This dilemma also illustrates the need to keep an eye on capital appreciation, especially in today’s low-rate environment. It’s why I’m likely to recommend that your portfolio includes a mix of equities.
Of course, flexibility and monitoring are critical. This isn’t a “buy and hold” portfolio. Adjustments can be made based on your personal situation. So, it’s important we monitor and modify as necessary.
If you expect a higher marginal tax bracket in the future, withdrawing from the traditional IRA today may be the most advantageous choice. But be careful the distribution doesn’t push you into a higher tax bracket in the year you take it. If you anticipate a lower tax bracket down the road, a Roth IRA may be the best option for today’s income needs. If cash is still needed or desired, then look to a traditional IRA. When it comes to tax matters, consult with your tax advisor.
However, there is one big advantage to leaving the Roth alone. You continue to take advantage of the tax-free umbrella the Roth provides. Or, you can hold on to the Roth for unexpected expenses. Moreover, the Roth can be used as an estate planning vehicle because heirs may be able to sidestep federal taxes when withdrawing from it.
These are just a couple of ideas designed to provide you with the proper framework as you enter or gear up for retirement. It is a broad overview that is designed to shed some light on a situation that’s unfamiliar to many. Each situation is unique, which means there are many other aspects of retirement income planning that could be useful for your specific situation.