Too Much... Too Little... Just Right
Many people have done a great job saving for retirement, but who are turned around when it comes to actually spending their savings. And it’s not surprising because it is the exact opposite mindset. (saving vs. spending)
Here are 5 withdrawal mistakes most often seen…
5 Retirement Withdrawal Mistakes
1– Taking Too Little Income. Some people have done such a great job saving money that they find it hard to stop! While that can be a good thing, savings becomes a problem if it interferes with them doing things that make for a great retirement; like traveling and seeing family, or fixing up their home the way they like it. You should have a plan to safely spend what you need to have a wonderful retirement - or as we like to say at NEXT… “build your money around your life, not your life around your money”.
2– Taking Too Much Income. OK, so we just talked about the dedicated saver… now let’s talk about the optimist… “Everything will work out”. Since the 1990’s, the conventional wisdom was that you could spend 4% of your assets each year without worry of running out of money. In the past few years, more advisors and economists have been much more cautionary about using the 4% number. It’s a great place to start but probably not a number that you want to follow blindly. You’ll need to actively manage how much you pull out, both to ensure you don’t run out of money AND to make sure you are spending as much as you can as well! One of the important reviews you need to perform each year is an examination of your withdrawal plan. If you need help with this, feel free to call.
3– Fear of touching your principal. Some folks have spent a lifetime with the goal of only using income and dividends and never touching principal. This has served them well, but after retirement, things change. First, you are now in the spending… not saving mode. And second, many times are you moving backwards. For example, it could make more sense to spend principal from your non-retirement account first and leave your interest and dividends to growing in your IRA. Your income will be the same… your money will grow the same… but you’ll pay less tax, so you’ll actually have more in your pocket!
4– RMD Mistakes. Required distributions from retirement accounts were waived in 2009, but they’re back! The IRS tells us the minimum we need to withdraw from our retirement accounts and if we don’t take out at least that amount after age 70 1/2, they’ll hit us with a whopping 50% penalty! So, you will want to make sure you take out your RMD, but as you’ll see in the next point, you might want to take it out sooner than you think.
5– Be Tax Smart. There is a smart way to pull money out of your accounts. There is a specific order by account and investment type to withdraw your money. By using the correct order, you’ll reduce your tax liability and possibly increase your income while reducing your chance of running out of money. If you have not specifically sat down and made a retirement withdrawal plan… please feel free to call.
Questions? Give me a call at 952-540-0153 or send me an email: [email protected]. Thanks! -Eric Hagen