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What
Should You Spend First in Retirement?
In a recent survey of retirees, nearly 20 percent reported that their overall
standard of living was worse than they had expected, and almost 30 percent
worried that they might not have enough money to live comfortably throughout
their retirement years.1
After experiencing two straight annual declines in the major market indexes,
many retirement-minded investors are looking for ways to stretch their
retirement savings.2 One method is to develop a
well-planned asset distribution strategy that answers the following questions:
How much money can I safely withdraw each year? Which assets should I liquidate
first?
Drawing on Your Savings
Calculating how much you can spend in retirement may seem simple, but doing it
effectively could involve quite a bit of number crunching. It requires running
through different scenarios using various assumptions about market performance,
inflation, portfolio volatility, and length of retirement to help you understand
your portfolio’s limitations. For example, it might be good to know how long
your savings would last if you withdrew $60,000 versus $80,000 a year, or if
your investments returned 6 percent versus 8 percent annually.
Knowing Where to Start
Deciding the order in which to spend your assets can also be challenging. It
involves considering the tax implications and opportunity costs of liquidating
each asset in your portfolio.
 One
common distribution strategy is to spend down taxable savings before tapping
into tax-deferred accounts such as IRAs and employer-sponsored retirement plans.
This allows you to stretch the potential growth of tax-advantaged savings until
you are forced to begin withdrawals at age 70½.3
Another option is to start by liquidating taxable assets with the highest
appreciated value. Although at first it may be tempting to cut your losses and
hang on to your gains, cashing in on winners could help you rebalance your
portfolio and take advantage of higher earnings. Capital losses acquired in past
years may be carried forward to offset the tax consequences brought on by
liquidating gains.
The uncertainty in today’s financial markets may give you cause to reevaluate
your retirement distribution strategy. Remember that a carefully crafted plan
could help ensure that your retirement savings will last as long as you do.
1) 2002 Retirement Confidence Survey, Employee Benefit Research
Institute
2) CNNMoney.com, June 19, 2002
3) Distributions from traditional IRAs and employer-sponsored retirement
accounts are taxed as ordinary income and, if taken prior to reaching age 59½,
may be subject to an additional 10 percent federal tax penalty. Withdrawals must
begin by April 1 of the year after the year in which you reach age 70½.
©
2002 Emerald Publications
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