Being retired doesn't mean you don't need to continue managing your nest egg intelligently.
It would be easy to assume that, once you enter retirement, your work as a retirement investor is done. But the truth is you can never really stop working to maintain your nest egg. The easiest way to manage your post-retirement funds is to create a plan ahead of time that addresses the potential pitfalls known to affect retirees. After all, it’s harder to fix errors once you’re retired – mainly because you’re no longer making consistent contributions and can’t make as many financial adjustments to compensate for mistakes.
The best-case scenario would be to start planning at least five years before you retire. If that timeline has passed you by, don’t fret. It’s never too late to utilize an effective approach.
Here are four considerations to keep in mind as you develop your strategy:
1. Carefully plan your annual distribution amount. Stick with the withdrawal rate you planned, even when the market is up. Resist the urge to take larger withdrawals when you see a spike in your account balance. There will be down times as well, and the dips will hurt far worse if you don't take advantage of the upticks.
Your distribution strategy should take into account all of your income streams, including Social Security benefits. In addition to your withdrawal rate, pay special attention to your tax liability. Since your income level determines your tax bracket and your ability to take certain deductions and write-offs, it’s worthwhile to work with an investment advisor to ensure you’re taking distributions at an optimal rate.
Your distribution plan should actually look similar to your contribution plan – but in reverse, of course. Regimented and steady distributions will have an effect similar to regimented and steady contributions. Each represents a form of dollar-cost averaging, and both will help your investments withstand long-term market fluctuations.
2. Know when to take correct required minimum distributions at the correct time. Traditional individual retirement account and 401 (k) account holders must begin RMDs the year he or she reaches age 701/2.
Failing to take an RMD results in a 50 percent tax on the amount not withdrawn. In addition, the distribution is still subject to ordinary income taxes if it was contributed on a pretax basis.
The timing for RMDs, as well as how to calculate the amount of the RMD, is a little complicated. A retirement advisor or tax advisor should be able to help you determine the amount of your RMD for each of the accounts you hold.Read more: How to Maintain Your Nest Egg in Retirement