Once you retire, your retirement accounts are likely to be your main financial lifeline. It’s why the average person may (or should) spend a substantial portion of their time thinking about how much they’re contributing over time. At some point in the future, accounts like your IRA are going to be your main source of income. You need to ensure that your post-work life is as livable and comfortable as possible.
While plenty of people put significant thought toward their contribution strategy, though, not as many may consider how they should go about withdrawing funds from their accounts. While you can generally start taking money out of these accounts at age 59 ½, it may not be the right strategy for everyone. It’s important to consider an array of factors that may help you find the best time to start withdrawing.
Which factors should you look at to form your withdrawal strategy? Generally speaking, the 4% rule is an advisable course of action that allows you to use your funds at a safe rate, but there’s more to the story than this singular tactic. You should be thinking about when and how you plan to withdraw funds from your accounts as early as possible, and in this blog post, we’ll provide you with information that may help you make that determination.
The 4% rule of retirement account withdrawal
The previously-mentioned 4% rule is a traditional approach that involves limiting your withdrawals from retirement accounts to 4% of your principal each year. This amount covers not only your own personal expenses, but other necessary ones like taxes. The actual amount of money that this percentage translates into will depend on your own personal circumstances, primarily the overall value of your accounts, but also the annual rate of returns on your investments.
If the past several years have seen significantly higher returns than 4%, you may find yourself tempted to withdraw a larger sum than this from your accounts annually, but this may put your long-term financial security at risk. While some years may see investment returns in the high single-digits or even double-digits, large withdrawals may turn your future 4% withdrawals into a much smaller sum of money than they’d otherwise be.
How can you plan ahead for withdrawal?
Retirement planning should include your intended rate of withdrawal from the very beginning. That rate needs to be able to cover your necessary living expenses after you’ve retired, and it should additionally allow for some additional room to spend for personal uses that allow you to actually enjoy your retirement. Keep the risk of changing taxation and investment return rates in mind as you determine how much you’ll be saving up.
Planning for account withdrawal also means determining when the right time is to start taking your money. While some strategies call for delaying your withdrawals until the age of 72, certain circumstances may make it more worthwhile in terms of after-tax income to start taking your money early and delay your Social Security benefits instead. You’ll need to determine the right course of action early in order to be prepared.
Start making your plan now
One of the most important general rules when it comes to retirement planning is to start the planning process as early as you can to increase the amount of money you have available to you later. Don’t forget to consider the types of expenses and financial variables you might face when you start making that plan.
Work with the Tennessee retirement planning professionals at Miser Wealth Partners to get a strong head start on funding your life after work. Schedule an appointment with us now to get started or contact us with any questions you may have.