Understanding how you will preserve your wealth in retirement can help alleviate a lot of stress. Discover a few ideas for establishing an effective withdrawal strategy.
Saving for retirement can take decades, so when the milestone actually arrives, it is important to have a retirement withdrawal strategy in place to ensure your wealth will last. This is important as there are different tax implications for how and when certain assets are utilized. Having a solid plan in place will help you manage your retirement assets as efficiently and effectively as possible.
Develop your spending plan
In order to determine how to disburse your money, you need to know how much you’ll need and when. This usually goes back to understanding your retirement goals. Do you plan to spend your retirement traveling? Or would you rather preserve your money for unexpected expenses? Your priorities should be reflected in your plan. Your financial team can help by asking a few questions and getting to know what you value and find important.
As you build your plan, you’ll want to consider all the different types of accounts that you have available to draw from. Note the different withdrawal parameters for each account – meaning how much you are legally required to withdraw, when you should begin to take withdrawals, and how taxes will impact your withdrawals. Your financial team will be able to help you review each account and understand the different aspects of each.
Understand withdrawal strategies
As you build your plan with your financial team, you’ll want to understand the different tax considerations you’ll encounter as you withdraw money. Talk to your team about how different withdrawal methods will impact your tax liabilities so you can create the most efficient strategy for your needs. There is no one-size-fits-all withdrawal strategy so talk through the specifics that impact you. While each account may have different withdrawal requirements, they may also have different withdrawal timeframes. Recent legislation has impacted the distribution rules associated with many retirement accounts, so be sure to talk to your financial team to determine what is best for you as they can run different projections to determine your options. For many, you will want to build your retirement withdrawal strategies around your Social Security (or pension plan) distributions. This may add some complexity to your planning process.
Fixed or dynamic withdrawal strategy
There are many different schools of thought for withdrawing money for retirement. Two common practices are “fixed” vs. “dynamic” withdrawal strategies. There are different pros and cons with each strategy and each will impact your taxes differently.
Fixed withdrawal strategy
As the name states, you would take a fixed amount every month or annually from your accounts. This can provide a predictable stream of income to budget and plan for; however, the flip side, if you need more money outside your fixed amount, you’ll need to discuss this with your financial team ahead of time to be sure there is cash available and to confirm that your assets will be able to withstand the impact of the additional withdrawal amount over time. Also, keep in mind this wouldn’t take into account any investment performance that your accounts experience. Typically, it does more harm to your portfolio to take withdrawals when the markets are down.
Dynamic withdrawal strategy
A dynamic withdrawal strategy means you would take different amounts every month or a different amount annually based on how your accounts perform against the stock market. As the markets rise and fall, so would your withdrawals, according to a pre-determined plan. The main idea behind this approach is that it allows you to spend more when your retirement portfolio is doing well, but it limits your spending (subject to a floor that is set between you and your team) when markets are performing poorly. This is something you should discuss with your financial team as it is a more complex strategy and your taxes could change every year depending on the fluctuations in your withdrawals.
Gifting as part of your withdrawal strategy
Finally, talk to your financial team about how different gifting strategies can be used as you withdraw funds from your accounts. There are different tax benefits associated with gifting to an individual or a qualified charity that can potentially minimize your tax liabilities. Discuss the different scenarios with your team if gifting is important to you.
Ultimately, the most important thing you can do to establish a successful withdrawal strategy is to create a plan. Your holistic financial plan will be your guidepost as you determine the best tactics for you to minimize taxes and maximize the longevity of your funds. By working with a financial team, you’ll be able to run different projections, discuss different scenarios, and decide what’s best for you.
Interested in learning more about Private Wealth Management? With UMB, you have a guiding partner from financial advising and investment portfolio management, to wealth-building strategies and retirement and legacy preservation plans.
