For decades, American workers had it figured out. Many people would spend their careers at a single company and then retire at 65 with pensions that would carry them through their senior years. Everyone did not get a gold watch, but retiring with a good pension was often a reasonable expectation.
That old system is either gone or quickly vanishing. Instead of a defined-benefit pension, the norm is now a 401(k) or some other vehicle where people save for their own retirement.
How do you position yourself, in this challenging landscape? It starts, of course, with careful estate and tax planning.
Financial planning is also important, and experts have several suggestions for people who are saving, but want to take some money out. One is to begin with the four-percent rule.
If you draw only four percent from your retirement accounts, then the interest on the remaining total should be enough to account for the withdrawn funds. By drawing only four percent, for example, on a $1 million retirement portfolio, you are accounting for longevity, and the odds are that you’ll still be able to draw from your account if you live to be 100.
Another approach is following the whims of the stock market. Instead of a fixed four-percent annual withdrawal, you can take amounts based on your fund’s performance. For good years, you take out more. For bad years, you take out less. That way, you’ll never run out of money.
Of course, to get to the point of having a healthy portfolio to count on, you have to not only save a portion of your salary but also invest in the right mix of stocks and bonds. Since stocks are more volatile, experts suggest increasing the investment in bonds as you get older. By the time you retire, you should have a good portion of your funds – let’s say at least 75 percent – in bonds while leaving room for additional growth with some well-selected stock funds.
You can also talk with an experienced attorney at our firm. We can help you determine the tax ramifications of your withdrawals and the right mix of funds to tap so that your nest egg provides for your senior years.
Source: “How to Cash Out in Retirement,” Wall Street Journal, 3-8-11