Yahoo Finance 4 Retirement Distribution Strategies That Will Make Your Money Last
Saving money to your retirement fund is only part of ensuring a financially secure future. The other half involves making smart decisions about when and how to withdraw cash.
Finance experts say there are a handful of retirement distribution strategies that can be used to stretch money further for a long retirement, and these can be combined and changed over time. "It's a moving target to some extent, and you need to be willing to move with it," says Mara Derderian, director of the financial planning program within the Bryant University finance department. "What a lot of people run into as a challenge is not being flexible."
Rather than pick a single strategy to use throughout retirement, talk to a financial planner to see how to make the following distribution methods work together for you.
[See: 9 Easy Ways to Save $500 More Per Year for Retirement.]
1. Create a floor. Some retirement accounts provide guaranteed income. These include Social Security, pensions and annuities. A flooring strategy involves building up enough guaranteed income to meet basic needs. That can be done by purchasing annuities or delaying the start of Social Security benefits. For each year you delay the start of benefits past your full retirement age until you reach age 70, you'll get an 8 percent boost in your monthly Social Security payments.
"If someone is really risk-averse, a flooring strategy works well," says Jamie Hopkins, co-director of the Retirement Income Program at The American College of Financial Services. A strong financial floor provides peace of mind that no matter how the markets perform, a person will be able to pay necessary expenses.
2. Bucket your money. For funds that don't provide guaranteed income, such as 401(k)s and IRAs, a bucket strategy ensures some money is protected for short-term use while other money is allowed to grow for long-term use.
While the details can vary depending on a person's needs and life expectancy, a typical strategy might use three buckets. They first may put money needed within the next three years in cash or bond funds. There, the money won't see significant gains, but the stability of these funds should insulate it against losses. Money that will be needed in three to 10 years may be put into a mix of stocks and bond funds where it may see more moderate growth. Funds not needed for 10 years or more may be invested more aggressively in growth funds.
"It self-insures the portfolio against market risk," says Jared Snider, a senior wealth advisor at financial advisory firm Exencial Wealth Advisors in Oklahoma City. Not only does the bucket strategy protect against losses, it helps ensure retirees won't have to pull money from stocks in a down market. "It's never in your favor to sell stocks at discounted prices."
[See: 10 Tips to Boost Your IRA Balance.]
3. Make systemic withdrawals. Some seniors treat their retirement accounts like piggy banks, withdrawing money whenever it is needed. However, a smarter approach is to make systematic withdraws of the same amount every month, quarter or year. "We're basically trying to create predictable income from a volatile market," Hopkins says.
Financial advisor William Bengen is credited with originating the 4 percent rule, which many people use to guide their systemic withdraw. The rule determined that withdrawing 4 percent from a retirement fund in the first year, followed by inflation-adjusted withdrawals every year after, should ensure money is available to sustain a 30-year retirement.
It's been nearly 35 years since Bengen created his rule and current advisors say people shouldn't be too wedded to the idea of withdrawing 4 percent. While the concept is sound in theory, the right percentage for a retiree should be customized to account for a person's age and life expectancy.
4. Use account sequencing. When it comes time to make those systemic withdrawals, people should be strategic about where they pull money from. Known as account sequencing, the optimal order for withdrawing funds is the one that will minimize taxes. "Lower taxes are what are going to keep more of the money invested and build wealth," says Matt Fellowes, founder and CEO of online financial advisory firm United Income.
United Income, along with other advisory firms, uses software to determine how best to minimize taxes. For those who are age 70 1/2 or older, the government requires certain minimum withdrawals be made from traditional retirement accounts. Then, depending on a person's individual circumstances, it might be best to pull money from taxable brokerage accounts or tax-exempt Roth accounts.
[See: 10 Ways to Repair Your Retirement Finances.]
Retirement distribution strategies can be daunting for many retirees to navigate. However, with professional guidance, these four methods can help ensure retirement accounts don't run dry.
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