Does your retirement planning include a plan for how you will take withdrawals from your retirement accounts?
You can spend your life saving for retirement with the assumption that once you reach retirement age, your work is done. Or you can recognize that money management continues into your golden years and do some financial planning ahead of time to make it easier.
The Motley Fool highlights “3 Mistakes People Make With Retirement Withdrawals” to help readers avoid missteps after working and saving for many years.
If you wait too long to withdraw money from certain tax-favored retirement accounts, you may info that those accounts have accumulated so much that they are in a higher tax bracket. Some people see the IRA requirement that one withdraw from a traditional IRA or 401(k) as a goal to reach or think of it as the time they should start to withdraw funds from these accounts. What they don’t realize is that they can take money from these accounts earlier and as indicated, it may be to their advantage to do so if they can avoid paying the taxes they would pay if the account moved into a higher tax bracket.
You will also need an overall plan because just withdrawing money when you need it can backfire. Budgeting based on your expenses while making sure you have some funds that remain untouched in case of an emergency sounds like what you have always been told to do. As a retiree, you need to be even more strategic unless you plan to go back to work. Some retirees do just that but you would want to do it because you found something you wanted to do and not because your nest egg ran out. And since you can’t count on being able to return to work so it is better to plan well.
While the order in which you withdraw funds from different retirement accounts does matter, there is more than one way to do this. That may seem like a contradiction but it isn’t. The best sequence for your retirement withdrawals depends on your financial goals. For example, people who wish to leave as much tax-free money as they can to their heirs should not withdraw from a Roth IRA first.
The Motley Fool says, “The value of a strong financial planner really comes through when it comes to planning retirement withdrawals.” and we would certainly agree.