Retirement
Spending Strategies
Nearly 80 percent of workers aged 45 and older have thought about how they will manage
their money in retirement so they don’t outlive their savings. Considering
that most people plan to live 20 to 30 years in retirement, their concern is a
valid one.1
One
way to help make the most of retirement dollars is by developing a distribution
strategy that defines how much money you can spend each year and in what order
your assets should be liquidated.
Running the Numbers
Life is full of variables, so identifying your optimal annual distribution
amount involves running a variety of calculations. These calculations should
take into account a number of scenarios, using different assumptions about
portfolio performance, market volatility, life expectancy, inflation, retirement
age, and income. For example, you might want to know how long your savings would
last if you withdrew $50,000 versus $60,000 a year. Or you might want to see how
hastening or postponing retirement could affect your portfolio.
Deciding What to Spend First
Determining the right order in which to spend assets can enhance the tax
efficiency and growth potential of your savings. As a general rule, it may be a
good idea to tap taxable assets first, allowing tax-deferred accounts to remain
untouched until mandatory withdrawals begin at age 70½. Consult your tax
advisor before taking action.
In addition, liquidating highly appreciated assets first can help rebalance your
portfolio and provide income during the early years of retirement. If you are
concerned about the tax consequences of selling gains, remember that losses
suffered during past years (up to $3,000 per year) can be carried forward to
offset capital gains realized in future years.
These suggestions help illustrate how proper planning can impact your retirement
outlook. Keep in mind, however, that your specific situation should dictate
which retirement distribution strategy is most appropriate for you.
1) 2003 Retirement Confidence Survey, Employee Benefit Research
Institute
© 2003
Emerald Publications
