by Sidney J. Ruth, CPA, CFP®
In retirement, the vast majority of investors must switch gears from asset accumulation to asset withdrawal. Shifting from saver to spender may be one of the most dramatic financial transitions in a person’s life and requires a host of assumptions, projections, and calculations known as retirement income planning. Ideally, an effective retirement strategy should provide adequate income, cash for emergencies, and an element of growth to protect assets against future inflation. A comprehensive assessment of your transition strategy prior to retirement could make the critical difference between meeting your retirement income goals and unexpectedly spending down all of your assets. The process of putting together an effective retirement income plan often involves answering the following questions.
What Will Provide Your Monthly Income?
Obviously, Social Security, any pensions, and any wages will contribute to your monthly earnings. Most retirees will also need to set up regular distributions from accumulated assets to cover remaining living expenses. Possible sources include: your investment portfolio, income annuities, charitable trusts/annuities, reverses mortgage payments, etc.
How Long Do You Need Your Money to Last and How Much Can You Withdraw Each Year?
These two questions are intertwined. If you don’t need your money to last long, you can withdraw funds at a much higher rate. For many retirees, planning to make your money last for the next 20-30 years is not an unreasonable assumption. The answer to this question will be crucial in creating an appropriate investment allocation strategy that addresses realistic income goals in conjunction with providing the growth necessary for a 20-30 year timetable.
Which Assets Should You Exhaust First?
You don’t have to tap IRAs until you’re 701⁄2. In most cases, it makes sense to take your initial withdrawals from your taxable accounts, and only take the minimum from your IRAs. This preserves the tax-deferred growth within the IRA and allows for the withdrawals from your taxable accounts to be taxed at lower capital gains rates. Every situation is different. Certainly, some estate planning considerations may alter the order of liquidation to achieve a stated goal.
How Much Do You Want to Leave Behind?
Whether to spend your last dollar on your last day or leave a legacy to heirs and/or charitable institutions should be decided early in your retirement. Lack of planning in leaving a legacy could result in an excessive tax bill for your estate or your heirs. It is also very fulfilling, when formulating a comprehensive estate plan, to be able to give a portion of your assets away as lifetime gifts to heirs and charities so you can share in the enjoyment of their use.
Investment advisor representative of Investment Advisors, a registered investment advisor and a division of ProEquities, Inc. Securities offered through ProEquities, Inc., a registered broker-dealer. Member NASD and SIPC. Franconia Insurance & Financial Services is independent from ProEquities, Inc.
FIFS Connection, Summer 2007, Vol.4, No. 3
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