Investment Planning Doesn't End After Retirement: 3 Things to Know Now

Deciding how much to withdraw.

A key factor that determines whether your assets will last for your entire lifetime is the rate at which you withdraw funds. The more you withdraw, the greater the likelihood you'll exhaust your resources too soon. But if you withdraw too little, you may have to struggle to meet expenses, and you could also end up with assets in your estate, part of which may go to the government in taxes. So it’s vital to estimate an appropriate withdrawal rate for your circumstances, and determine whether you need to adjust your lifestyle and/or estate plan.

Your withdrawal rate is typically expressed as a percentage of your overall assets, even though withdrawals may represent earnings, principal, or some combination of the two. For example, if you have $700,000 in assets and decide a 4 percent withdrawal rate is appropriate, the portfolio would need to earn $28,000 a year if you intend to withdraw only earnings; alternatively, you might set it up to earn $14,000 in interest and take the remaining $14,000 from the principal.

An appropriate and sustainable withdrawal rate depends on many factors including the value of your current assets, your expected rate of return, your life expectancy, your risk tolerance, whether you adjust for inflation, how much your expenses are expected to be, and whether you want some assets left over for your heirs. You'll probably need some expert help to ensure that this important decision is made carefully.

Deciding which accounts to withdraw from first.

Many retirees have assets in various types of accounts--taxable, tax-deferred (e.g., traditional IRAs), and tax-free (e.g., Roth IRAs). Given a choice, which type of account should you withdraw from first? It depends on a number of factors:

• If you will not be leaving assets to beneficiaries, the answer is simple in theory: withdraw money from a taxable account first, then a tax-deferred account, and lastly, a tax-free account. This will provide for the greatest growth potential due to the power of compounding.

• In practice, however, your choices may be directed by tax rules, because retirement accounts (other than Roth IRAs) have minimum withdrawal requirements beginning by April 1 of the year following the year you turn age 72. Failure to do so can result in a 50 percent excise tax imposed on the amount of the required minimum distribution that you failed to take.

• If you will be leaving assets to beneficiaries, it’s more complicated. If you have appreciated or rapidly appreciating assets, it may be more advantageous for you to withdraw from tax-deferred and tax-free accounts first because these accounts will not receive a step-up in basis at your death and your heirs could face a larger than necessary tax liability.

However, if you intend to leave your entire estate to your spouse, it may be better to withdraw from taxable accounts first because spouses are given preferential tax treatment with regard to retirement plans – the funds in the plan continue to grow tax deferred, and distributions need not begin until the spouse's own required beginning date. 

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Balancing safety and growth with the "two bucket" approach.

To ensure a consistent and reliable flow of income for your lifetime, you must provide some safety for the principal in your investments. This is why retirees typically shift at least a portion of their investment portfolio away from riskier high-growth investments to more secure income-producing investments. Unfortunately, safety comes at a price – reduced growth potential and erosion of value due to inflation.

One solution may be the "two bucket" approach. Determine your sustainable withdrawal rate (see above), and then reallocate a portion of your portfolio to fixed income investments (e.g., certificates of deposit and bonds) that will provide you with sufficient income for a predetermined number of years. You would then reallocate the balance of your portfolio to growth investments (e.g., stocks) that you can use to replenish that income "bucket" over time.

Be sure that your fixed income investments will provide you with income when you'll need it. One way to accomplish this is by laddering. For example, if you're investing in bonds, instead of investing the entire amount in one issue that matures on a certain date, spread your investment over several issues with staggered maturity dates. As each bond matures, reinvest the principal to maintain the pattern.

As for the growth portion of your investment portfolio, common investing principles still apply: diversify your holdings, invest on a tax-deferred or tax-free basis if possible, and monitor your portfolio and reallocate assets when appropriate.

Continued investment planning after retirement is critical, but can be complex.

It’s a good idea to consult an attorney who specializes in estate planning as well as a trusted financial advisor for help in creating and managing the best strategy for your particular situation. When it comes to living well in retirement, one size does not fit all. At Weiss, Hale & Zahansky Strategic Wealth Advisors, we help our clients to create a plan that best meets their individual needs and priorities through our strategic Plan Well, Invest Well, Live Well™ process. See how we can help you to create your own strategy for living well in retirement.

Authored by Vice President, Associate Financial Advisor, Michael Baum, CFP® RICP®. Securities and advisory services offered through Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser. These materials are general in nature and do not address your specific situation. For your specific investment needs, please discuss your individual circumstances with your representative. Weiss, Hale & Zahansky Strategic Wealth Advisors does not provide tax or legal advice, and nothing in the accompanying pages should be construed as specific tax or legal advice. 697 Pomfret Street, Pomfret Center, CT 06259 and 392-A Merrow Road, Tolland, CT 06084. 860-928-2341. www.whzwealth.com.