Have you thought about the sequence in which you will withdraw your retirement income? The incorrect sequence of execution might cost hundreds of thousands of dollars. The sequence in which you withdraw your retirement funds can be important because it can affect the overall amount of money you have available to you during retirement.
Here are several factors to consider when you retire:
Start With Investment Income
When you withdraw from your assets first, your retirement funds have more time to accumulate compound interest. You might lose years’ retirement income if you immediately withdraw from your 401(k) or IRA.
Withdrawals from mutual funds, a brokerage account, exchange-traded funds (ETFs), stocks, and bonds are subject to capital gains tax. Some assets, such as mutual funds, require you to pay taxes on payouts each year. If you are on sure which applies to you, check with a fiduciary financial advisor to determine whether this applies to your funds.
Do not automatically apply for Social Security at age 62
To receive the maximum amount of Social Security benefits, you must work until your “full retirement age.” However, your benefits are not your maximum at ages 62, 66, or 67. At age 70, the full Social Security retirement payout begins. If you file before the deadline, you will not receive the entire possible benefit.
After full retirement age, your payout will grow annually by a specified percentage depending on a set of factors. To maximize this method, waiting until age 70, when payouts will be the greatest possible and will increase by 8% yearly.
This technique will help you obtain the most Social Security payment, but every circumstance is unique.
Delay Withdrawals From Your 401(k) and IRA Until Required Minimum Distributions (RMDs) Become Effective.
At age 59 and a half, you can begin taking money from your 401(k), but that doesn’t mean you should. The law does not force you to begin taking Required Minimum Distributions until you reach the age of 72, so your funds can continue to grow with compound interest throughout this period.
Don’t tap your Roth IRA until you’ve exhausted all other options.
You should delay Roth IRA withdrawals as long as feasible. You paid taxes in advance, so withdrawals from your Roth IRA will not be considered taxable.
Your Roth IRA will grow tax-free even when you withdraw from other accounts. Since a Roth IRA contains after-tax money and the IRS does not need to tax them again, you are not required to take RMDs. This account will continue to grow if you do not access it.
How to Plan Your Withdrawals in Retirement
Planning how to withdraw your funds is different for everyone. Hiring or consulting with a financial professional to determine the appropriate order for withdrawing funds from your retirement accounts is recommended. Although it is impossible to anticipate the future, a financial counselor can help you prepare for it.
According to research conducted by Northwestern Mutual in 2020, 71% of U.S. citizens acknowledge their financial planning needs to be better. Nevertheless, just 29% of Americans use a financial counselor.
Working with a financial advisor has a different value for each individual, and advisors are prohibited by law from guaranteeing returns. Still, research indicates that if you work with a financial advisor, you’ll feel more comfortable about your finances and have 15% more money for retirement.
A recent Vanguard research indicated that a hypothetical $500K investment managed by an adviser would grow to over $3.4 million over 25 years, while self-management would provide an anticipated value of $1.69 million, or 50% less. In other words, a professionally managed portfolio would average 8% annualized growth over 25 years, whereas a self-managed portfolio would average 5% annualized growth.