Cracking Into Your Nest Egg
How to take money from your savings without going bust

By Michael J. Jappell

With so much focus these days on saving for retirement, it’s easy to overlook an equally critical step that relates directly to your future security—how successfully you convert your savings into retirement cash flow. This process might sound simple, but it prompts several key questions: Which account should you draw from first? How do you keep your remaining assets growing? And, perhaps most important, how much can you take out each year without running out of money?

Withdrawal Rates
Not surprisingly, an aggressive withdrawal rate increases the likelihood of depleting your assets prematurely. Generally, 4-percent per year (indexed for inflation) has been the recommended withdrawal rate for most people. But one size does not fit all and 4-percent may be more—or less—than you need.

One objective shared by many investors is to develop a withdrawal strategy that aims to give you as much as possible—especially in the early, active years of your retirement. For example, you may decide on an initial withdrawal rate to be increased every year by inflation. Or you may withdraw a fixed percentage of the previous year’s ending portfolio value, with no increase for inflation. A more conservative option would be to increase the rate for inflation only in years when your investment returns are positive. You may wish to recruit a financial professional to help you with this process.

Once you have settled on a withdrawal rate, it’s important to stick to it and avoid altering your spending patterns dramatically. Increasing your withdrawal rate even slightly can jeopardize your standard of living later in retirement, compromise your ability to meet unexpected expenses and decrease the amount you’re likely to leave to heirs. On the other hand, decreasing your rate might cause you to unnecessarily sacrifice your standard of living in your early retirement years, when you have the greatest chance to truly enjoy your newfound time.

Order of Depletion
Conventional wisdom says to draw down taxable accounts first and keep tax-deferred accounts growing. For many people, that rule of thumb holds true; but again, for others it may not apply. Wealthier investors, for example, may want to spend tax-deferred assets with the intention of bequeathing taxable assets, which receive more-favorable tax treatment when inherited. Other investors may want to sell low-basis assets first, so they don’t incur the income later and trigger higher taxes on their Social Security benefits.

You’ve worked too hard saving for retirement to not get the most out of it. So once you’ve crafted a strategy for withdrawing income in a tax-efficient way, aim to review your situation on a regular basis to make sure you stay on track for the retirement you deserve.

Michael Jappell is a Financial Advisor and may be reached at 516-932-4826 or www.fa.smithbarney.com/jappell