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?
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!
Retirement income withdrawal is actually a lot of harder than people think. If you just use the rule of thumb of 4%, what will happen if the market has a really bad return for a year or two? Then you may risk not to have enough for the future withdrawals when you simply follow the general rule.
Truthfully, this is the time to consult with a RICP® (Retirement Income Certified Planner) to first evaluate your cash flow and see how much the fixed income from Social Security, pension, annuity etc. can cover your living expenses. When there’s a gap, hopefully the RMD from the retirement account can cover that. Meanwhile, use a checking account or build a CD-ladder to hold 3- to 5-year of living expenses so that you can weather the stock market storm through thick and thin. The RICP can help you project how much income from the investment you need to replenish this living expense bucket and how much you can take annually. The number may vary depending on the strategy you work out with the RICP.
That’s the gist of retirement income withdrawal. In actuality, it takes time to pre-plan and active monitoring to achieve your goals for maintaining a lifestyle you desire and not running out of money too early. Best!
You have hit on something that a lot of people do not realize. There is just as much strategy required during the portfolio distribution phase, during retirement, as there was during the accumulation phase. It is best to distribute in the most tax efficient manner, which means your taxes will be minimized and not effectively diminish you money's ability to continue to work for you. A couple examples, then I suggest you work with a fee-only financial advisor to work this out to your best advantage.
If you have investments that are paying dividends, you may have them on an automatic reinvestment program. However, even though they are reinvested, you will still pay taxes on those dividends each year, as per your 1099 at year-end. Better to take those same dividends as part, or all, of your 4% withdrawal, since you are already paying taxes on them, rather than sell something else, to make a withdrawal, and pay taxes on those dollars as well.
Another example: you will likely have holdings that have unrealized losses which could be harvested to offset other gains you may have by selling off shares to make a withdrawal. You may actually strategize to spread minimal capital gains taxes across future years so as to confine yourself to particular tax brackets rather than unnecessarily slip into a higher bracket in any given year.
You may also want to make adjustments to how much cash you maintain in your account(s) so as to provide for a regular schedule of withdrawals to meet your needs, but still liquidate holdings on an investment driven schedule rather than your personal expenses schedule. You do not want to be forced to sell low because the electric bill is due.
Looking forward, we are currently living under the terms of the Tax Cuts and Jobs Act of 2017. Most of the provisions of that act are due to expire in 2025, at which time we will revert back to the prior rules unless the terms of the act are extended, in full or part. As we plan year-to-year, this contingency must be kept in mind so there are no surprises. I wish you the best.
There are many ways to approach this. I usually tell my clients that they should focus on investing in instruments that provide the income they need. This can be a mix of stocks, bonds, and real estate. The reason to focus on income is so that should something happen suddenly, like what just happened to the stock market at the end of 2018, your investments are still producing the income needed to meet your retirement goals.
This is a bit different then selling shares to meet your requirment because it does not involve the possibility of selling at low values.
As for actually taking the income, there are some that prefer to get a fixed number every month like a paycheck and others that take the income as it comes in. Overall, how you take the income is a personal preference. The important thing is that your investments are aligned with your goals.
It is pretty simple. I prefer to have 4% (or 5%, which is the rate I suggest my clients withdraw) in cash for a year's worth of withdrawals and another years worth of withdrawals in a short-term bond-type fund, so if the market swings greatly within a 24 month period we don't have to sell during low troughs.
I would encourage you to seek out a “Fee only” independent Registered Investment Adviser (RIA). RIA’s are fiduciaries and will have your best interest at heart. Find one who is a Certified Financial Planner professional ™ (CFP®). You can find advisers at the following websites:
National Association of Personal Financial Advisors - https://www.napfa.org/financial-planning/how-to-find-an-advisor
Financial Planners Association - http://www.plannersearch.org/