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Winding Up Withdrawals:
Retirement Savings Part 3
As you approach retirement, how will you access the money you worked so hard to save? This is part three in our retirement savings series: Plan Your Withdrawal Rate.

Your withdrawal rate is the portion of your portfolio that you liquidate each year for income. How much can you withdraw each year without exhausting your savings?

Did you miss Part 1? The first step is understanding what type of accounts are best for you and establishing savings goals. Read more about how to Start with Strategy here.
In Part 2, we discuss how to establish an effective asset allocation for your retirement accounts. Read more about The Balancing Act of Allocation here.
Thought needs to be given to the order in which you tap various accounts to account for tax considerations and required withdrawals from accounts like 401(k)s and traditional IRAs.

Withdrawal Rate

What is a Withdrawal Rate?

The percentage you withdraw annually from your savings and investments. The maximum percentage you can withdraw each year and still reasonably expect not to deplete your savings is your “sustainable withdrawal rate.”

A sustainable Withdrawal Rate works hand-in-hand with your Allocation Plan LINK to make sure your portfolio will be able to provide for both your needs and wants during your golden years. Again, the priority is achieving the balance between providing sufficient current income and eliminating the chance that you could run out of savings in your later retirement years.

There are multiple strategies to establish your withdrawal rate. Some choose to withdraw a fixed percentage each year, and others adjust their withdrawal rate based on their age or portfolio performance. The value of your savings, your income needs, life expectancy, risk tolerance, and inflation will all factor into what method is ideal for you.

Generally, an appropriate withdrawal rate is somewhere in the 4-5% range.

Order of Withdrawals

In addition to establishing a sustainable withdrawal rate, you will also need to plan for what order you will tap your various investment accounts. There are three types of accounts: Tax Deferred (such as traditional IRAs), Tax-Exempt (such as ROTH IRAs), and taxable accounts (such as individual and joint investment accounts). There are two approaches to deciding what order to tap these types of accounts.

Prioritizing Income:

This strategy withdraws funds from taxable accounts first, followed by tax-deferred, and finally tapping tax-free accounts when the rest have been depleted. The logic of this technique is that by utilizing tax-favored accounts last, you will keep those retirement dollars working for you longer on a tax-deferred basis.

Prioritizing Estate Planning:

This second technique depletes tax-deferred and tax-free accounts before taxable accounts. This is ideal if you have appreciated or rapidly appreciating assets and are concerned about leaving part of your portfolio to your children, grandchildren, or other beneficiaries. Tax-deferred and Tax-free accounts will not receive a step-up basis when they are inherited by your beneficiaries. This would increase the amount of capital gains tax if those appreciated assets are sold. Working through these questions can involve your whole team: not you’re your financial advisor but also your tax professional and estate lawyer.
Step-up in basis, or stepped-up basis, is what happens when the price of an inherited asset on the date of the decedent’s death is above its original purchase price. The tax code allows for the raising of the cost basis to the higher price, minimizing the capital gains taxes owed if the asset is sold later.

Required Minimum Distribution (RMD)

The final factor to implement into your withdrawal plan is making sure you plan for any Required Minimum Distributions. This is primarily to make sure that the IRS can eventually tax your previously tax-deferred accounts.

“You cannot keep retirement funds in your account indefinitely. You generally have to start taking withdrawals from your IRA, SIMPLE IRA, SEP IRA, or retirement plan account when you reach age 72.”

This does not apply to Roth IRAs but will apply to beneficiaries who may inherit a Roth.

The amount you have to withdraw is calculated on an annual basis and is calculated by dividing the -year-end account balance by a specified distribution table. There are resources on the IRS’ website to calculate your RMD, but generally, the custodian of the account will have already calculated it for you.

Be sure to plan for your RMDs and how you want them to factor into your withdrawal rate in order to avoid the 50% penalty tax the IRS imposes.

Your retirement savings are a crucial part of planning for your retirement. If you have any questions about how to Implement a Strategy, Determine Allocation, or Plan Your Withdrawal Rate your advisor is a great resource to make sure you are on track.

Amidst volatile markets and dire headlines, it can be stressful to try and plan for retirement. There are so many factors you cannot influence, however, there are five things you can control:

How Long Will I Work?
How Much Can I Save?
How Much Will I Spend in Retirement?
How Much Risk Will I Take On?
What Will I Leave Behind?

These are the Five Levers. Plan your retirement by answering these questions and adjusting these levers to account for your priorities and goals. This series has been focused on answering the question of “How Much Can I Save?”

If you are ready to evaluate the next Lever of retirement planning, be sure to download our full guide.

Sources:

Step-Up in Basis: Definition, How It Works for Inherited Property (investopedia.com)

Retirement Topics — Required Minimum Distributions (RMDs) | Internal Revenue Service (irs.gov)

Investments – Greenwood Capital Associates, LLC

Greenwood Capital is an SEC registered investment advisory firm. This material has been prepared for information purposes only, and is not intended to provide, and should not be relied on solely for tax, legal or accounting advice. The information contained within has been obtained from sources believed to be reliable but cannot be guaranteed for accuracy.  The opinions expressed are subject to change from time to time and do not constitute a recommendation to purchase or sell any security nor to engage in any particular investment strategy. Investment Advisory Services are offered through Greenwood Capital Associates, LLC, an SEC-registered investment advisor.

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