Retirement Withdrawal Strategies

Tax Efficient Retirement Withdrawal Strategies

Withdrawal of retirement funds is often overlooked while planning for retirement. There are many perks tax-efficient retirement withdrawal strategies have, and other retirement withdrawal strategies also have their own advantages. Discover the ones that fit your situation and needs. Not all methods work for everyone. Some techniques may work for you but aren’t suitable for others. Learn more about what withdrawal strategies are available and how your advisor can create a customized strategy for you.

4% Rule

Very well known in the financial industry, the 4% rule is a great approach to begin your journey toward strategically planning your retirement. This approach signals you to withdraw 4% of your savings during the first year of your retirement. Every following year of the first initial withdrawal, take another 4% of your savings while keeping in mind inflation adjustments. This method is considered relatively safe and is mainly used if you still have other sources of income going toward your retirement.

Total Return Approach

A total return approach is also similar to the 4% strategy, except with a slight tweak to its method. The 4% withdraws exclusively from your savings account. The total return approach withdraws money from all your investment accounts, like annuities, dividends, and returns, before ever withdrawing from your savings account. The total return strategy can provide an extra shield preventing you from withdrawing from your principal account as much as possible.

Take Fixed-Dollar Withdrawals

Retirement withdrawal strategies like these can seem like the ideal option, but don’t discount the risks because it doesn’t consider performance on the account. When you pull fixed dollar withdrawals, you take a fixed amount of money from your retirement fund on a monthly, quarterly, or yearly basis. Investment accounts like annuities and mutual funds can assure there will be regular payments of the fixed amount each withdrawal period.

Create a Floor

Creating a floor may be one of the safest retirement strategies. Creating a floor involves building up enough sources of income to guarantee a sufficient amount of external income to cover your current expenses. These outside investments are secured earnings like pensions, annuities, social security, and mutual funds. Market performance is typically not a huge factor when you have these sources.

Use Account Sequencing

Using account sequencing can be a helpful tax-efficient retirement withdrawal strategy. Account sequencing is obtaining a target amount of money through your investment and savings accounts, which can ultimately minimize taxes and create strategic withdrawals.

Withdraw a Fixed Percentage

A fixed percent withdrawal is similar to the 4% tax efficient rule. The main difference with a fixed withdrawal percentage is that the number does not change when you withdraw. Fixed essentially means unchanged, while the 4% can vary based on inflation. It’s up to you to decide what percentage fits your financial situation best; meeting with one of our advisors is a great way to help you with the process. When determining a percentage to withdrawal keep in mind factors such as: current savings, age/life expectancy, and the funds you’ll require during retirement. This strategy can seem riskier during a bear market, especially if your portfolio doesn’t perform very well.

Bucket Your Money

This method can give you more freedom and help you create a more detailed plan. The bucket strategy lets you split your savings into separate accounts for separate decisions and timelines. Some ways to divvy out your savings account is to first start by opening up a high-yield savings account for the short term, or you can invest in bond/cash funds. For cash, you need access to it soon (within 2-10 years), you could keep that money in a mix of bonds, stocks, and CDs for decent growth, or you could create a fixed-income investment account. For money you don’t plan on touching for 10+ years, you can put that money into long-term investment/retirement accounts or growth funds.

Minimize Mandatory Distributions

Several standard retirement accounts must have RMDs (Required Minimum Distributions). An RMD is the amount of money that needs to be withdrawn from an employer-sponsored retirement plan or IRA by owners and participants who qualify. The age for withdrawing money as of 2022 is 72 years old. Once an account holder reaches this age, they must withdraw their money by the following April 1st; if the money is not withdrawn during this time period, it can lead to a considerable tax penalty. That being said, minimizing your RMDs can be an excellent tax strategy! You can reduce your RMDs by reorganizing your money from retirement accounts like a Roth IRA, which you can withdraw and possibly grow tax-free.

Limit Withdrawals to Income

Limiting your withdrawals to your income can be an exceptionally safe retirement strategy that limits your withdrawals to the income stemming from investments. It may not be realistic for everyone, but it can be a good approach. This strategy lets the principal amount of money grow or stay the same, as you only withdraw money from investments. This method is best used when combined with larger accounts with substantial retirement income from other sources. For example, a 10% return on $800,000 is $80,000, assuming it’s a 10% return. This strategy is a bit inconsistent in down or volatile markets relative to what your investments can return.

Factors that Affect your Withdrawals

Taxes and social security are the two main factors that may affect your retirement plan. Stay aware of the different variables and factors to maximize your tax strategies when planning for retirement.

Taxes

When you retire, you are not exempt from paying taxes; similar to being self-employed, you are still required to pay. Depending on what accounts you have, there can be tax penalties for withdrawing money. Understanding what accounts you have and the tax regulations for those accounts can keep you secure during retirement.

Social Security

According to the Social Security Administration, the earliest age you can withdraw money is 66 years and four months. When you reach retirement age, you can receive full social security benefits and continue to work without consequences. If you delay using your social security, you could increase your monthly percentage per year until you are 70.

Talk to an Advisor at TruNorth Today

Contact us today or submit a form and we’ll set up a consultation to meet with you to understand your goals and visions, create a strategy, and implement a roadmap for your future retirement.