Robert Williams, CFP, managing director of wealth management for Charles Schwab Center for Financial Research, Lone Tree, Colorado. Schwab.com
Whatever strategy you use to withdraw money from your retirement portfolio, beware of the following landmines…
Mistake #1: Thinking drawdowns have to cover all your annual spending. You need to generate enough cash to cover only expenses that won’t be met by guaranteed sources of income such as part-time work, pensions and Social Security.
Mistake #2: Not maximizing your Social Security benefits, which can reduce the burden on your retirement portfolio, especially in advanced old age. For every year from when you’re eligible to receive Social Security payments until you turn 70, you earn a “credit.” If you were born in 1943 or later, that credit is 8% for each of those years. So if you hold off until age 70, your annual benefits will be 76% higher than what they would have been when you were 62.
Mistake #3: Failing to prepare for “sequence-of-returns” risk early in retirement. The biggest danger for many withdrawal strategies is multiple down years in the stock market—similar to 2000, 2001 and 2002—just as you stop working. Reason: It drains your savings too quickly and leaves you with fewer assets to generate returns when stocks recover. One solution: Keep three years’ worth of expenses in cash and short-term Treasuries to reduce the amount you need to draw down in a bear market and to mitigate the effects on your portfolio. During bull-market years, you can replenish your fund with cash that you withdraw from your portfolio in excess of your living expenses.
Mistake #4: Not fine-tuning your withdrawal plans as a couple. Even if you and your partner agree on an annual budget and how much to draw from your investments each year, you may have to cut back on non-essentials when the stock market is down. Agree ahead of time about what constitutes discretionary spending. Example: An annual golf membership or winter vacation to a warm locale may be an essential expense for one partner but not for the other.
Mistake #5: Not running your drawdown plans past your accountant. How much after-tax money you have to spend each year greatly depends on which accounts you choose to withdraw from, since traditional and Roth retirement accounts and taxable accounts all receive different tax treatments. Example: Many retirees avoid tapping tax-deferred accounts early in retirement to allow them to grow—but that could leave you with very large required minimum distributions (RMDs) starting at age 73 (if you were born after 1950 and before 1960) and push you into a higher tax bracket.