The Basics Q&A:
Retirement Income That Measures Up
Q: Pension income, investments, a 401(k) account: What’s a smart way for me to draw on these sources to meet my retirement needs?
A: ALL THOSE POTENTIAL RESOURCES CAN PROVIDE YOU WITH a solid foundation for retirement. How best to draw on them depends on your age and lifestyle, as well as all of your anticipated—and unanticipated—expenses. A conversation with your financial advisor can help clarify the strategy that might work best in your situation. That said, there are some points that anyone entering retirement should think about.
One of the first things you'll want to do is figure out which of the accounts you’ve mentioned above have required minimum distributions (RMD). Because there can be penalties for missing a deadline, keeping track of all of your RMD deadlines can help you get the most efficient use of your various sources of income. Some people find it convenient to roll multiple 401(k) accounts into one IRA so that they only have to worry about one RMD deadline
Taxes are another important factor to consider as you create your drawdown strategy. Withdrawals from taxable investment accounts are taxed at capital gains rates, while withdrawals from an IRA or 401(k) may be taxed at higher rates—as regular income. If you exhaust your taxable accounts too soon, and you suddenly find yourself facing unexpected expenses, you'll be forced to take the money out of an account that could cost you more in taxes.
Remember to stay flexible. No matter what plans you have at the outset, life keeps changing, and so will your needs. You may find out that you don't want to travel as much as you thought you did. Or you might decide that you need to help out a family member financially. Your income sources could vary, too. For instance, you could decide that you want to go back to work part-time to bring in extra money.
One thing I know for sure is that your answer today will almost certainly be different in five years. I suggest taking the time right now to think through a drawdown strategy that suits your individual needs. And, as your life and the markets change, look for ways to correct your course as needed. For more insights on how to manage your finances as you transition into retirement, read "Tackling Retirement Risks." And check out the latest findings from Financial Power’s study in partnership with Age Wave, “Finances in Retirement: New Challenges, New Solutions.”
A: ALL THOSE POTENTIAL RESOURCES CAN PROVIDE YOU WITH a solid foundation for retirement. How best to draw on them depends on your age and lifestyle, as well as all of your anticipated—and unanticipated—expenses. A conversation with your financial advisor can help clarify the strategy that might work best in your situation. That said, there are some points that anyone entering retirement should think about.
One of the first things you'll want to do is figure out which of the accounts you’ve mentioned above have required minimum distributions (RMD). Because there can be penalties for missing a deadline, keeping track of all of your RMD deadlines can help you get the most efficient use of your various sources of income. Some people find it convenient to roll multiple 401(k) accounts into one IRA so that they only have to worry about one RMD deadline
Taxes are another important factor to consider as you create your drawdown strategy. Withdrawals from taxable investment accounts are taxed at capital gains rates, while withdrawals from an IRA or 401(k) may be taxed at higher rates—as regular income. If you exhaust your taxable accounts too soon, and you suddenly find yourself facing unexpected expenses, you'll be forced to take the money out of an account that could cost you more in taxes.
Remember to stay flexible. No matter what plans you have at the outset, life keeps changing, and so will your needs. You may find out that you don't want to travel as much as you thought you did. Or you might decide that you need to help out a family member financially. Your income sources could vary, too. For instance, you could decide that you want to go back to work part-time to bring in extra money.
One thing I know for sure is that your answer today will almost certainly be different in five years. I suggest taking the time right now to think through a drawdown strategy that suits your individual needs. And, as your life and the markets change, look for ways to correct your course as needed. For more insights on how to manage your finances as you transition into retirement, read "Tackling Retirement Risks." And check out the latest findings from Financial Power’s study in partnership with Age Wave, “Finances in Retirement: New Challenges, New Solutions.”
