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Golden Years of Retirement

By on August 15, 2013
Retirement2

Building a fiscally fit foundation and accumulating wealth as you enter into your forties are the first two stages of a multi-stage effort for a financially sound life.  The third stage is Pre-retirement, the five year period prior to the desired retirement age.  There are  two elements to consider:

  • The complete elimination of debt
  • Developing a plan to draw-down the retirement nest-egg

Up to this point, eliminating debt was a goal.  However, now that you are close to leaving the workforce, it is absolutely essential to be debt-free as debt, along with taxes, is an impediment to maintaining fiscal fitness in retirement.  As debt is reduced, attention should be turned to developing a plan for drawing down the nest-egg.  Too many retirees jeopardize their retirement by drawing down their nest-egg too fast and in an inefficient order.

Regarding withdrawal rate, a popular method is the 4% rule.

In general, the rule says that if a retiree takes out 4% of their nest-egg the first year in retirement, and then adjusts that rate to account for inflation in each subsequent year (e.g. if inflation rises 1% during the first year of retirement, 5% would be taken out during the second year in retirement), they will not run out of money for at least three decades.  While some believe it is simply too arbitrary, some believe it is too high, and some believe too low, it provides a good starting point for most people.  Determining the withdrawal rate, whether it be the popular 4% rule, or others such as the interest only strategy, must be accomplished prior to retirement.

Determining the order of withdrawal from the various retirement accounts is also key prior to retirement.  For example, if the retiree is 70½ years of age, the general rule of thumb is to first withdraw from accounts where Required Minimum Distributions (RMDs) are mandated.  However, for most retirees, the order of withdrawal, before they reach 70½ years of age and are subjected to RMDs, will be from taxable accounts (e.g. brokerage cash account), then tax-deferred accounts (e.g. 401[k]), and finally tax exempt accounts (e.g. Roth IRA).

If all of this seems overhwhelming, it can be so plan ahead. Get informed. Read. Talk to people. Talk to lots of informed people.

Taxable accounts are withdrawn first as they are generally taxed at favorable dividend and capital gains rates, and only on the capital appreciation.  If the expectation is that future tax rates will be higher than current rates, it makes sense to withdraw from tax-deferred accounts first.  But if the expectation is that the future tax rate will be lower than the current, retirees should spend from tax exempt accounts first.  Developing a plan with regards to the rate and order of withdrawal, prior to retirement, is the final key to fiscal fitness.

 

James Molet is the author of RENDEZVOUS WITH RETIREMENT: A Guide to Getting Fiscally Fit available on Amazon.com. Mr. Molet shares insightful financial information for Healthyblackmen.org readers in a 3-part series. This article submitted for those nearing retirement stage of life.

3 Comments

  1. Dominique

    January 24, 2015 at 12:13 pm

    Can I just say what a comfort to uncover someone who truly understands what they’re
    discussing on the net. You actually realize how to bring a problem to light and make it important.

    A lot more people should check this out and understand this side of your story.
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  2. James Molet

    August 16, 2013 at 9:43 am

    For most people it is too late to go back to work at 70, 72, or 74 if they realize their nest-egg is going to fall short. There is absolutely no doubt that there has to be a plan in place for drawing down the nest-egg in such a way as to maximize its effectiveness over 20-30 years in retirement. Too often people only focus on the accumulation phase. Being debt free and developing a plan for the order and rate of withdrawal is key. Thanks for the feedback.

  3. Jason Vitug

    August 16, 2013 at 3:59 am

    This is a great topic of discussion. We often think of savings for retirement and its rare that I hear folks talking about what to do when you’re retired. The importance of a plan to use the retirement savings.

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