By Scott Ford, CEO, Founder & Wealth Advisor of Cornerstone Wealth Management Group
Chances are you have a 401(k) or an IRA and are making regular contributions to bulk up your retirement savings. A recent Fidelity study tells us that 401(k) saving rates have hit a record high of 12.9%, and the average account balance has shot up from $74,900 five years ago to $95,500 today.1 We are inundated with information about the importance of these accounts, the benefits of 401(k)s and IRAs are frequently promoted, and employer matches encourage us to build up our nest eggs. Contributing is the easy part
But what’s not easy is figuring out how and when to withdraw from these tax-protected accounts when you are ready to retire. What happens when you get to the point where you need the money you spent decades sacrificing for?
Why You Need A Strategy
Your withdrawal strategy, or lack thereof, is a big deal and can have a major impact on how much of your hard-earned money you ultimately keep. If you blindly take your money and run, you could trigger an avalanche of higher Social Security taxes, investment surtax, capital gains taxes, and even higher Medicare premiums which will eat away at the funds that were supposed to carry you through retirement. You need an intentional game plan to make sure everything works together. The last thing you want at this stage of your life is a financial surprise that will result in a lower standard of living.
What You Need To Know
Figuring out your withdrawal strategy can be fairly complicated. Here are some basics to give you the big picture:
Required Minimum Distributions
This is the annual payout savers must take from their retirement accounts when they turn 70½. If you miss a distribution or were unaware of this rule, you will face harsh consequences. The financial penalty for not following the RMD rule is 50% of the distribution you should have taken.
IRA vs. 401(k)
Many people wonder if they should roll their 401(k)s into an IRA. There are pros and cons to both sides and the answer is not cut and dried. It will depend on your individual circumstances. Here are some details to keep in mind:
- IRAs usually offer more investment choices than a 401(k).
- Many 401(k) investment options involve high costs and hidden fees.
- If you have multiple 401(k) accounts, consolidating them into one IRA might help you stay organized with your financial plan.
- 401(k)s often have more flexibility if you want to retire early or late.
- If you want to keep working, you can delay taking your RMD from a 401(k).
If you do a search online, you will find plenty of rules of thumb for how much you should withdraw, but the truth is, your withdrawal rate is an extremely personal calculation. It’s all about how much risk you are willing to take and how much money you have socked away. If you take too much, you run the risk of running out of money prematurely. If you take too little, you could end up with a lower standard of living and lower quality of life.
Technically, the “safe” withdrawal rate means the rate that relies on historical analysis. This rate should be sustainable, even in the worst-case scenarios. In profitable years, though, a higher rate would work, meaning that it’s not easy to pick an appropriate withdrawal rate.
You also need to look at time horizon and asset allocation. The sooner you start tapping into your funds, the lower your rate should be in order to stretch your money for as long as you can. Regarding asset allocation, your mix rate will also determine your rate of return. Bonds are lower risk, but will not generate the same amount of gains as stocks.
Your Behavior Matters
A real and serious consideration is sticking with the withdrawal plan you set in place. Just like with any financial goal, if you aren’t consistent, there will be consequences. If you aren’t faithful with a budget, your finances will be a mess. If you don’t adhere to a savings plan, your savings won’t grow.
One way to ensure that you stay true to your strategy is to have regular meetings with your advisor. In this way, you will develop a clear view of your situation and won’t be unaware of what is happening with your nest egg.
How We Can Help
When it comes time to create a strategy to withdraw from your retirement accounts, you need an experienced and educated partner by your side. Your decisions in this matter could result in either unnecessary loss or growth and confidence. The little things done exactly right will have an astonishing impact on your life and how far your money will go. To get started pursuing true wealth, schedule an appointment by clicking here now. If you have questions, you can reach me by phone at (301) 739-8505 or by email at email@example.com.
Scott Ford is CEO, Founder and Wealth Advisor of Cornerstone Wealth Management Group, serving entrepreneurs, business owners, executives, and their families. The firm specializes in business liquidity strategies and SBA financing strategies. It is Scott’s mission to help his clients pursue financial freedom and live a balanced and fulfilled life.
Scott is a Wealth Advisor and Registered Financial Consultant (RFC). He was recognized as one of the 20 Rising Stars of Wealth Management by Private Asset Management Magazine in 2008 based upon assets managed of $1 million or more per client. Since 2005, Scott has been an active financial technical analyst.
Clients often choose to work with Scott because of his experience with the challenges business owners and executives face as well as his firm’s disciplined process. His personal and proactive approach is designed to bring clarity and simplicity to the complex issues of financial management. For over 20 years, he has been helping his clients define and pursue their own unique version of “True Wealth.”
Scott is the author of three books: Financial Jiu-Jitsu: A Fighter’s Guide to Conquering Your Finances, The Widow’s Wealth Map: Six Steps to Beginning Again, and the New York Times Bestseller, The Sustainable Edge: Fifteen Minutes a Week to a Richer Entrepreneurial Life.
He and his wife, Angie, reside in Hedgesville, WV and have two wonderful children as well as a dog and a cat. In addition to spending time with his family, Scott is a voracious reader and enjoys woodworking, Brazilian Jiu-Jitsu, golf, hunting, permaculture and beekeeping; basically anything outdoors.
Some IRA’s have contribution limitations and tax consequences for early withdrawals. For complete details, consult your tax advisor or attorney. Distributions from traditional IRA’s and employer sponsored retirement plans are taxed as ordinary income and, if taken prior to reaching age 59 ½, may be subject to an additional 10% IRS tax penalty.