We work for years saving for retirement. And building your nest egg over the course of your career is no easy task, but what can be more complicated and seldom discussed – is figuring out the best strategy for “withdrawing” the money you saved during retirement. With many retirees living well into their 90s, a well-planned withdrawal strategy can ensure a lifetime of financial security.
Continue Reading Below
Dan Keady, CFP and senior director of financial planning at TIAA-CREF (Teachers Insurance and Annuity Association – College Retirement Equities Fund) offered the following tips to FOXBusiness.com for withdrawing your savings for retirement. Here is what you need to know:
TIAA-CREF financial advisors recommend that retirees and near-retirees think through several considerations when deciding the best strategy for withdrawing the money saved for retirement. Specifically, TIAA-CREF recommends that individuals consider the following:
Boomer: How can I create a lifetime stream of income as I reach my full retirement age?
Keady: As you get closer to retirement, it is important to refocus your approach because you need to replace some portion of your current pay check to pay your basic bills. For example, regardless of how the stock market is doing, you need to buy food and other basic needs.
We believe that your basic expenses, or needs like food and shelter, should be matched to reliable sources of income and sources that you cannot outlive, by creating what we call a “guaranteed income floor.” For example, Social Security payments and lifetime annuity payments can provide an income floor unrelated to the stock market. Additionally, with many people now living into their 90s and even their 100s, creating a guaranteed income floor helps protect against longevity risk.
Continue Reading Below
After you have built your guaranteed income floor, the remainder of your assets can be invested in a diversified portfolio to withdraw from to cover your discretionary needs, maintain your purchasing power and offset inflation, as well as explore the potential of creating a legacy and leaving something to your heirs, depending on the magnitude of your wealth.
Boomer: When determining your drawdown strategy, what part should your Social Security income play?
Keady: We believe that Social Security is a cornerstone in retirement planning. When you elect to start Social Security, how you coordinate benefits with your spouse’s election can have a profound impact on your income plan.
In these times of low interest rates and assuming reasonable health, it may be a big benefit to delay starting benefits. You should compare and contrast your many options, using a Social Security calculator. Consider working with a financial advisor, who is also capable of integrating Social Security claiming strategies into your overall income plan.
Remember that Social Security checks offer inflation protection, supplies income you cannot outlive, and provides survivor benefits to spouses.
Boomer: If I own both tax-deferred and taxable accounts, which do I spend down first?
Keady: When creating a drawdown plan, retirees should consider the various tax implications that exist. You may have savings and investments that you have already paid taxes on, such as money markets and CDs- often these should be spent first. Stock investments should be looked at next because they may qualify for lower tax capital gains rates than your marginal income tax rate. Drawdowns from IRAs will be taxed like ordinary income, so in most cases they should come next. The last bucket of savings to draw on is any tax-free savings, like assets in a Roth IRA. They can continue to grow the most efficiently, and if you don't need them during their lifetime, they can be great vehicles to pass on to family.
However, based on your actual tax situation, other drawdown ordering may be superior, especially in low tax years. You should work with your advisor and tax consultant to create your strategy.
Boomer: Should I pay off my mortgage if I want to stay in my home?
Keady: For many people, paying off their mortgage can make sense and provide a peace of mind with reduced monthly expenses, especially if the deductible mortgage interest is not important to their tax situation.
However, consider where the money is being withdrawn from in order to pay off your mortgage. For example, if you need to draw a large sum from your 401k or IRA to pay off the mortgage, this could be very costly from a tax standpoint. Why, because you could be withdrawing a large amount of funds at a very high income tax rate compared to your typical rate. Therefore, you will need to withdraw far more than your mortgage amount to also pay taxes. Consult your tax advisor.
But if you can afford to, often making some additional payments along with your monthly mortgage payment can reduce the number of years before you pay off your mortgage and can help you save on the interest you pay.
Boomer: If my mortgage is paid off, should I use the equity I have for my retirement income needs?
Keady: Before considering a reverse mortgage, carefully consider the pros and cons of this strategy. Remember that homeowners may take advantage of the equity in their home by downsizing to a less costly home or by holding the home and selling at a later time.