How do you withdraw money from your portfolio once you're retired?

How do you withdraw money from your portfolio once you're retired? If you have a portfolio and want to withdraw 4 percent each year, do you just sell enough shares to get the 4 percent and try to gain enough income to build that back up, or am I making this harder than it really is?

Personal Finance, Asset Allocation
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2 days ago

Yes it is fairly straightforward if you have the right focus.  You want to make sure you're positioned to maximize your risk-adjusted, after-tax returns.  Risk adjusted means you need to ensure your assets are only exposed to enough risk to sustain your goals.  After-tax returns are all that matters, so to capture the most bang here you need to make sure you are holding the right type of assets in the right type of accounts.  In other words you  want to hold capital gain treated assets (i.e. stock funds) in your taxable accounts (i.e., living trust, joint account, individual) and hold ordinary income generating assets (i.e., bonds) in tax deferred accounts. And if you have tax exempt accounts such as Roths you'll generally want to place alternative investments or REITs there.  

This sounds complicated but its not.  Holding capital assets in taxable accounts let's you harvest losses to offset current portfolio income and minimize future gains (it also allows you to capture a foreign tax credit and step up in basis at death).  Holding bonds in tax-deferred accounts defers the income on those bonds.  Holding appropriate alternative investments in Roth accounts let's you capture available returns but defer the gains on usually tax in-efficient assets.  

Once that structure is in place, start each year with a review of your overall asset allocation - how much you have in stock funds, alternative funds and bonds. What's the appropriate amount in each that will grow your assets enough to best help you sustain your desired lifestyle? 

Next identify sources of income that will automatically hit your tax return.  Social Security?, Pension?, RMD's, Dividend and Capital Gain distributions from your taxable investment accounts.

Meet any shortfall to fund your lifestyle by first selling stock funds at highest possible cost basis to minimize tax bite.  This will be an efficient way for you to get to your desired 4% withdrawal rate.  But important to make sure that 4% is sustainable for your circumstances. 

Also if you're in the financial position to do so, consider naming a charity as the beneficiary of your IRA or donating the annual RMD to charity so to reduce your taxable income.  Its also important to review estate planning documents and overall tax planning efforts to make sure your planning is up to date with current laws. 

Good luck and all the best!


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