You’ve saved it – now how do you withdraw it?
Congratulations on building a healthy nest egg of $500,000 or more! Now that you are nearing or in retirement, the question becomes: how do you access this money to live comfortably without depleting it too quickly?
This is where a well-defined retirement withdrawal strategy comes in. It aims to ensure you have a steady income stream throughout your golden years while preserving your principal for the long haul. Here, we explore five strategic withdrawal strategies for those with $500k+ in investable assets:
1. The Bucket System: Organize Your Withdrawals for Confidence
Imagine dividing your retirement savings into three metaphorical “buckets” – each with a specific purpose and risk tolerance:
- Short-Term Bucket (1-3 Years): This bucket holds your most liquid assets, like cash or short-term bonds. It covers immediate living expenses for the next few years, ensuring easy access to funds without touching your long-term investments.
- Intermediate-Term Bucket (3-10 Years): This bucket focuses on a balance between growth and stability. It might include a mix of stocks and bonds, prioritizing income generation for mid-term needs.
- Long-Term Bucket (10+ Years): This bucket is all about growth potential. Here, you can invest in stocks and potentially some riskier assets to outpace inflation and grow your nest egg for the long haul.
Benefits:
- Confidence: Knowing you have separate funds allocated for different needs reduces stress.
- Protecting your future: The short-term bucket helps to safeguard your long-term growth from immediate spending needs.
McAdam Financial Recommendation:
The bucket system allows for customization. You can adjust the asset allocation within each bucket based on your risk tolerance and time horizon. For instance, someone comfortable with more risk might allocate a larger portion of their long-term bucket to stocks for higher growth potential.
2. Required Minimum Distributions (RMDs): Turning a Tax Obligation into an Opportunity
Once you reach age 72 (subject to change), the IRS requires you to withdraw a minimum amount from certain retirement accounts (like IRAs) each year. These withdrawals are called Required Minimum Distributions (RMDs).
Benefits:
While RMDs might seem like a forced withdrawal, they can be used strategically:
- Tax planning: While you’re forced to withdraw from your tax-deferred accounts (i.e. traditional IRAs, 401(k)s), you can reinvest the funds into accounts with different tax implications for the future, or donate them to write them off as a charitable distribution.
- McAdam Financial tip: Consider consulting a qualified financial advisor to optimize your RMD strategy for maximum tax efficiency. Our retirement withdrawal specialists are ready to assist you.
3. Systematic Withdrawals: Predictable Income with Automatic Adjustments
This strategy involves setting a fixed percentage of your portfolio value to withdraw each year (e.g., 3-4%). This provides a predictable income stream, like a paycheck, throughout your retirement.
Benefits:
- Stability: Systematic withdrawals can offer confidence with a consistent income flow.
- Automatic adjustments: This method automatically adjusts your withdrawals based on your portfolio value. If your portfolio grows, you can withdraw more; conversely, if the market dips, your withdrawals decrease, helping to preserve your principal.
McAdam Financial Recommendation:
For added security, consider a “guardrail” approach. Set a minimum and maximum withdrawal rate based on market conditions. This helps ensure you don’t withdraw too much during downturns, preserving your nest egg for the long term.
4. Qualified Longevity Annuity Contracts (QLACs): Possibility of Guaranteed Income for Your Golden Years
QLACs are specialized annuity contracts designed to provide guaranteed income later in life. You invest a portion of your retirement savings in a QLAC, and in return, you can receive a guaranteed income stream starting at a future date (usually age 85 or later).
Benefits:
- Tax-deferred growth: Contributions to QLACs grow tax-deferred until you start receiving income.
- Guaranteed income: QLACs offer peace of mind that can provide a potentially guaranteed income stream, especially valuable for longevity planning.
McAdam Financial Recommendation:
QLACs come with limitations:
- Withdrawal restrictions: QLACs often have restrictions on withdrawals and surrender options.
- Carefully evaluate: Before investing, carefully review the terms, fees, and withdrawal options associated with a specific QLAC product.
5. Roth Conversion Ladder: Tax-Free Income and a Legacy for Heirs
This strategy involves gradually converting pre-tax retirement savings (like traditional IRAs) to Roth IRAs over several years. You pay taxes on the converted amount upfront, but the beauty lies in tax-free qualified withdrawals from Roth IRAs in retirement.
Benefits:
- Tax-Free Income: Traditional IRAs and 401(k)s grow tax-deferred, meaning you do not pay taxes on contributions, but withdrawals in retirement are taxed as ordinary income. Roth IRAs, on the other hand, grow tax-free and allow tax-free qualified withdrawals in retirement. This means you get to keep more of your hard-earned money. With a Roth conversion ladder, you strategically convert portions of your traditional IRA to a Roth IRA over time. You pay taxes on the converted amount upfront, but since the money then resides in a Roth IRA, all future growth, and qualified withdrawals (distributions from contributions and earnings held for at least 5 years) are tax-free. This can set you up for a reliable stream of tax-free income in retirement, potentially reducing your overall tax burden and gaining more control over your taxes in retirement.
- Legacy for Heirs: Inherited traditional IRAs are generally taxable to beneficiaries. They can owe income tax on any withdrawals they make from the inherited account. Inherited Roth IRAs, however, offer a significant advantage. If your beneficiaries follow the IRS distribution rules, they can generally withdraw the money tax-free.
McAdam Financial Tip: By using a Roth conversion ladder, you can potentially leave a larger tax-advantaged inheritance to your heirs. They’ll have more flexibility to access the money without incurring tax penalties, allowing them to use it for their own financial goals.
How McAdam Financial Can Help:
At McAdam Financial, we specialize in retirement decumulation strategies, also known as drawdown strategies. These strategies focus on helping you protect, spend, and grow your retirement nest egg. Our team of experienced financial advisors can work with you to develop a personalized withdrawal plan that considers your unique financial goals, risk tolerance, and time horizon.
Here’s how one of our Financial Advisors, held to a fiduciary standard, can assist you with your retirement planning needs:
- Optimizing your withdrawal strategy: We’ll analyze your retirement savings and income sources to create a sustainable withdrawal plan that meets your current and future needs. This may involve implementing the Bucket System, crafting a systematic withdrawal strategy, or incorporating other techniques to maximize your retirement income.
- Tax-efficient planning: We’ll help you navigate the tax implications of different withdrawal strategies, including RMDs and Roth conversions. Our goal is to help minimize your overall tax burden and maximize your after-tax retirement income.
- Investment management: We’ll manage your retirement portfolio to ensure it remains aligned with your risk tolerance and withdrawal needs. This may involve adjusting your asset allocation over time to balance growth potential with income generation and capital preservation.
- Ongoing monitoring and adjustments: We’ll continuously monitor your retirement plan’s performance and adjust as needed. This ensures your strategy adapts to changing market conditions, your evolving needs, and any life events that may impact your retirement income.
By partnering with McAdam Financial, you can gain the confidence and clarity you need to navigate your retirement journey. We’ll help you develop a sustainable withdrawal plan that allows you to enjoy your golden years while preserving your financial security.
Call 855-MCADAM5 now! Or click to schedule your consultation online.
Written by McAdam Financial as of 6/18/24. This article is provided by McAdam LLC (“McAdam” or the “Firm”) for informational purposes only. Investing involves the risk of loss and investors should be prepared to bear potential losses. Past performance may not be indicative of future results and may have been impacted by events and economic conditions that will not prevail in the future. No portion of this article is to be construed as a solicitation to buy or sell a security or the provision of personalized investment, tax, or legal advice. Certain information contained in this report is derived from sources that McAdam believes to be reliable; however, the Firm does not guarantee the accuracy or timeliness of such information and assumes no liability for any resulting damages.
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