With retirement savings, it's use it or lose it

 

New York Daily News

Many people pondering retirement may actually have more wealth than they realize, but the trick is tapping it without blowing it.

New York City's Mayor Michael Bloomberg is fond of saying that smart financial planning is making sure the check to the undertaker bounces. While the odds of hizzoner bouncing a check are long, his point is that we all want our assets to last precisely as long as we do. Spend too much, and you're in trouble; don't spend enough and you might cheat yourself.

"Most people are incredibly conservative when it comes to spending down their assets," said John Ameriks, a principal in the investment counseling and research group at Vanguard, the big mutual fund company.

Assuming you have savings beyond Social Security and a pension, you need to figure out how to draw down on it.

One way can provide comfort, but at the potential price of peace of mind.

The second likely assures long-term security, but could leave you temporarily wanting.

The first technique, dollar-adjusted withdrawal, allows you to keep pace with inflation, but the downside is that you could run out of money. Each year, you increase the dollar amount of your withdrawal by the previous year's national inflation rate. Assuming your holdings are 50 percent stocks and 50 percent bonds, and that you begin by taking out 3 percent to 4 percent of assets, you have at least a 75 percent chance of your money lasting 30 years if you use this formula.

If you want greater certainty that you won't outlive your assets, the second approach, withdrawing a fixed percentage, might be for you. If you take out 4 percent to 5 percent annually, growth in your portfolio should allow for a lifetime of withdrawals. Unfortunately, because of market fluctuations, in some years you will have to make do with less money.

In choosing which accounts to tap first, the idea is to delay paying taxes as long as possible. That gives your money more time to compound. If you're under age 70 1/2, that means you should spend money from any taxable accounts first. That may sound counterintuitive, but remember that you've already paid taxes on capital gains from mutual funds that aren't in your retirement accounts. Meanwhile, IRAs are tax deferred and Roth IRAs are tax-free. It's best to let these continue to compound while you spend down the money in the taxable accounts.

If you are 70 1/2 or older, you are mandated by law to take minimum distributions from IRAs. In fact, you'll face penalties if you don't take the required minimum distributions. Only after you've taken these and exhausted taxable accounts should you dip into employer-sponsored retirement plans or take more from IRAs. Last to be liquidated should be Roth accounts, which under current tax law continue to grow and may even be passed, free of income tax, to your heirs.

Read more Business Wires stories from the Miami Herald

Miami Herald

Join the
Discussion

The Miami Herald is pleased to provide this opportunity to share information, experiences and observations about what's in the news. Some of the comments may be reprinted elsewhere on the site or in the newspaper. We encourage lively, open debate on the issues of the day, and ask that you refrain from profanity, hate speech, personal comments and remarks that are off point. Thank you for taking the time to offer your thoughts.

The Miami Herald uses Facebook's commenting system. You need to log in with a Facebook account in order to comment. If you have questions about commenting with your Facebook account, click here.

Have a news tip? You can send it anonymously. Click here to send us your tip - or - consider joining the Public Insight Network and become a source for The Miami Herald and el Nuevo Herald.

Hide Comments

This affects comments on all stories.

Cancel OK

  • Marketplace

Today's Circulars

  • Quick Job Search

Enter Keyword(s) Enter City Select a State Select a Category