Drawdown

After accumulating retirement funds for your entire life, it may seem like a daunting, relieving or overwhelming task to eventually draw it down. Luckily, there are many different ways to access your cash. This article will discuss the ways to tactically move money to your accounts as well as ways to access your money before standard retirement age and even ways to optimize for taxes!

Asset Allocation

Firstly, you need to ensure that your allocation is appropriate for your amount of risk. The older you are (the shorter your remaining retirement), the less risk you should be willing to take. As mentioned elsewhere, I have found (age-10)% in bonds is an appropriate amount. Retiring Americans should also have at least 10% of their portfolio in cash, if not higher. A standard allocation for a 60+ American looks similar to 30/50/20 stocks/bonds/cash, especially if there are assets outside of the retirement accounts, for example home equity in your primary residence. If not, it is still meaningful to keep the asset allocation fairly conservative and try to bide time to get as high a Social Security payout as possible (66 is technically the full retirement age).

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Rebalance Every Year

Every year (some do more frequently if they like to micromanage), it is wise to rebalance all of your assets. If stocks do a lot better than bonds, for example, your portfolio will have a higher proportion of stocks in it than you were comfortable taking a year prior. Thus, in this scenario, it is best to sell stocks and buy lesser performing assets, such as bonds and cash. During this time, also, you should pull out what you expected annual expenses will be into checking. This money will now be entirely secure for the next year, where you can place it in a savings account to try to squeeze out a few percentage points. This way you already have your expenses for the year and your accounts are separate: you will not confuse your "spending moneny" with your "retirement money". Often, if you have assets that pay a lot in dividends, this transfer can come straight out of cash (because the cash stockpile has built up the past year from the dividends).

Optimize For Taxes!

When pulling out money from retirement accounts, the difference in the tax treatments in withdrawals are extremely important. Traditional IRAs and 401(k)s have to pay ordinary income on any money that is pulled out. Roth IRAs and Roth 401(k)s owe no taxes whatsoever on the withdrawn funds. Taxable accounts are subject to the same dividend and capital gains taxes as ordinary income. You can use the differing tax treatments to your advantage. Consider the following example: you have $500,000 in 401(k), $200,000 in Roth IRA, $200,000 in stock held over a year and are married looking to spend $100,000. If you take $75,300 out of the 401(k), you are able to take money out of either of the other accounts for no tax liability (because long-term capital gains are 0% at that income level and Roth IRA never has to pay taxes on withdrawals!) Consider holding the parts of your portfolio that pay a lot of dividends (for example, bonds) in the tax-protected accounts.