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How to Tap Your Nest Egg in Retirement

For the Baby Boomers close to retirement, and those already retired, one of the biggest challenges is determining how best to turn assets into income.

“Often people don't think about the transition from earning income to spending retirement funds. Many of our clients are not familiar with tax terminology, nor do they understand how their withdrawal decisions affect the amount of taxes they will pay. It is important to look at the assets of the entire household, not just one individual. Putting together a household approach and paying attention to asset allocation will help you reach your retirement goals,” says Charles Weinrich, first vice president, SunTrust Investment Services, Private Wealth Management.

Simply put, picking the right withdrawal rate is critical, says James Heafner, president of Heafner Financial Solutions.

There's no magic trick though, to getting it right. “It's clear. You need a strategy. Pack your bags for retirement with tools to help,” says Michael Fliegelman, a financial advisor with Strategic Wealth Advisors Network.

The experts weigh in on how best to withdraw your money in retirement.

Find the percentage that works for you

As a general rule a 4-5% withdrawal is acceptable. Younger retirees, 55-65, should steer closer to 4% and those older are better positioned for a 5% withdrawal, says Ian Arrowsmith, vice president of investments and retirement advisor with Scarborough Capital Management. “This strategy assumes about a 50%-50% split between stocks and bonds at normal retirement ages and would get more conservative, (increasing the bond allocation), as the retiree ages,” he explains. For example, it's acceptable to be 80% bonds and 20% equities in your 80s.

Remember the basics

However, there is much more to consider than just what percentage to withdraw to successfully manage having your funds outlast you and your spouse on this planet, says Roy Laux, president of Synergy Financial Services.

Stick with some basics of retirement financing. First, he says, establish a liquid source of funds designed for emergencies such as a new roof or furnace. Put the conventional 3-6 months of earning plus any large ticket items you anticipate replacing in the next future. “Cash is still king. Life's curveballs are no means limited to those in the workforce. In fact, the lack of a steady paycheck, puts an even greater premium on maintaining a robust stash of cash. Emergency funds aren't just for your kids,” says JJ Montanaro, a certified financial planner with USAA.

Second, create an essential income account. To do this, you will need to create a monthly budget of expenditures and subtract that amount from fixed sources of income such as Social Security and pension. If there is a shortfall and you have investment funds, place the funds necessary to cover the shortfall into an account that will provide a lifetime guaranteed amount that covers the shortfall.

Thirdly, he says establish an account designed for growth that parallels your risk tolerance. “I am pretty sure that if you retire at 66 and do live to be 80 or 90, what pays the bills today will fall short then, due to inflation and yo will need additional income,” says Laux.

What matters most?

For all the rules, the amount of money you withdraw and where you withdraw it from is largely dependent upon your individual circumstances. What are your goals, priorities?.

But that said, here's an option. First spend all the money from your non-retirement accounts. These funds are not taxed as ordinary income as you spend then, but rather as capital gains, explains Arrowsmith.

“We often have clients who are retired and want to take a $10,000 IRA withdrawal, when they have $50,000 in a savings account at a bank. It is much better to spend the individual accounts first,” he says.

If you take $10,000 from an IRA and have 20% withheld for taxes, you'd net $8,000. But if you leave that in the IRA to continue to grow, and take the same $8,000 from savings, with no tax liability, your net worth will be better served.

Second, withdraw from IRAs and 401k accounts. These distributions are considered ordinary income and taxed as such. Finally, Roth IRAs should be tapped.

To keep it simple, think about the three buckets of wealth you accumulated during your working years – taxable, tax deferred and tax free. When you retire, spend the taxable first, then the tax deferred and the tax free last, it's the best bucket to accumulate long term, advises Wayne von Borstel, president von Borstel and Associates.

Don't ignore reality

No rule is forever golden, says Montanaro. That 4% withdrawal may work today, but life, health and markets all change over time and demand that you periodically assess your strategy to ensure you remain on track.

At age 70 ½ you will need to take a “Required Minimum Distribution” (RMD) from pre-tax or “qualified” accounts, such as traditional IRAs, 401ks, SEPs or Simple IRAs. This is a minimum amount calculated by the IRS that you are required to take annually based on your current life expectancy. You can always take more, and be taxed on that, but this would be the minimum you would need to take or you could face fines or penalties, says Weinrich.

Says Montanaro, “A bury-your-head-in-the-sand approach to retirement income is a recipe for disaster. Small adjustments to income or expenses today, can yield long term results.”

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Comment #1 by paoli2 posted on
Nice article but for some of us in real life we don't get a choice about how much to tap.  Life decides what we need and when we need it.  The only thing we have a choice about is the Required Minimum Distribution which we have to take.  If it is enough to take care of unforeseen expenditures, we don't have to tap more but if not, we just take what is needed and do not be concerned about percentages etc.  Must be nice to be able to be in control of what one will need during these times but in our world it doesn't work that way.

Comment #2 by ytytytyt posted on


Dear Ms Nance-Nash,

>> Small adjustments to income or expenses today, can yield long term results.

Sure ... small adjustments to expenses perhaps are doable ... But how to go about doing small adjustments to income?


>> But if you leave that in the IRA to continue to grow,
>> and take the same $8,000 from savings, with no tax
>> liability, your net worth will be better served

Well ... if the inflation-fearmongers here (and elsewhere) are to be believed with their dire predications of upcoming doom, then any sort of growth in IRA would seem an impossible thing! :-)  But I'd agree with the logic/math of the this.

... I wonder how will this work-out from the perspective of the inflation-fearmongers?  ... I guess their opinion will be since growth is not possible, take it all out and put it all in precious metals ... or foreign banks ... or since American Society/Economy is sure to collapse anyways ... spend it quick while you still can!

Yours Truly,
- Anonymous

Comment #3 by Anonymous posted on
“This strategy assumes about a 50%-50% split between stocks and bonds at normal retirement ages and would get more conservative, (increasing the bond allocation), as the retiree ages,” he explains. For example, it's acceptable to be 80% bonds and 20% equities in your 80s.

Thus, if one has their entire savings in deposit accounts, such as certificates of deposit yielding 1-2%, a 4-5% rate of withdrawal would be unacceptable. Couple that with inflation, historically at a 3% rate, and one's savings wouldn't last very long. Perhaps the only retirement plans available for those putting all their eggs in the 'FDIC insured' basket is to progressively spend less and less as they grow older, receiving a plush pension, having amassed quite a fortune and spend it down, or for some, just keep on working.

Comment #4 by RickNP posted on
#3: I realize this sounds harsh and uncaring, but what would make someone keep his/her retirement nest egg invested at less than the rate of inflation unless they actually had another reliable source of income?

Comment #5 by paoli2 posted on
#4  You didn't ask me the question but since I am one of "those" people, I would like to respond.  To me, our youth is when we should be dedicated to amassing as much income as we can for our senior years.  If we have done our job in our youth, we should have enough money saved to be able to handle whatever expenses we incur in our senior years and not have to worry about interest rates.  Higher interest rates would be a nice but by this time we should be able to use what we have saved and not have to depend on "having" to get higher rates.  If I can get 2%, I am a happy camper and I could care less about inflation and all the rest of the junk I hear about how worthless my money is.  Worthless or not, it's still spendable.

Comment #6 by Wil posted on
The problem with general rules is that they are, well, general.  The 4%-5% percent withdrawal rate assumes a principal that is yielding at least close to that much, if not equal or greater. And rules of thumb about percentages of assets in equities and bonds ignores market conditions. It certainly is not acceptable for someone in his 80s to be 80% in bonds if bonds are overpriced relative to other asset classes. A truly diversified portfolio would not be limited simply to stocks and bonds anyway. Also, much of this advice has to be tailored to other sources of income in retirement. Someone having a traditional pension, for example, would have different needs than someone having a 401 (k), or no employer-sponsored retirement plan at all. The advice about having liquid funds or emergencies, and the order of accounts in which to tap first to last, is good advice, and a worthwhile reminder. But the final part of the article, 'don't ignore reality,' ought to have been mentioned sooner, rather than as an apparent "afterthought."

Comment #7 by Wil posted on
Just a correction of a typo: second to last sentence in my previous post should read "The advice about having liquid funds for emergencies . . ." It would be nice if we could edit our blog posts.