Retirement Plan Money Withdrawals - How much is Safe?

When people retire or need to withdraw money from pensions or investments, they get confused on what to do. How to withdraw money for income needed and from which account is always tricky. Here are five options for an easy withdrawal plan. Choose one or more depending on your personal situation:

1. Keep two years of retirement income needed in cash. This is especially good when we have a bond market that is volatile like we have today. Have all income (including dividends, cash, pension, etc.) go into a money market to replenish the income that you take out. Keep two year’s worth of income in the money market account.

2. Don’t take more than a 4% withdrawal of all assets. Studies have shown that if you withdraw more than that, you will spend down principal. That maybe okay with you if you are 70 years old, but not when you are 55.

3. Some people invest in an immediate annuity for their income needs. This becomes the fixed income portion of their portfolio and they don’t have to worry about cash, Certificates of Deposits or bond income. They get an income for life, but the downside is that few have an inflation rider and many have high internal fees.

4. Take a combination of withdrawals that produce taxable income, tax-free income, and capital gain income to keep your tax rate down while you withdraw. Remember, you get to spend only that amount that you withdraw after tax so don’t take everything out that is taxed at ordinary income rates. Split it up if you can with Roth withdrawals (potential tax-free income), muni -bond dividend income (tax-free income), or sell a portion of investments each year (potential tax-favored capital gain income).

5. Keep one year of laddered (3 month, 6 month, 1 year) Certificate of Deposits that you use to take income from (when they come due) and replenish those CDs with income from other sources. This is labor intensive since you must continually look for new CDs as they come due but it assures you the highest interest on your cash holdings while you are also taking withdrawals.

Withdrawal plans don’t need to be confusing. With these five options you can choose a plan that will give you the income you need while maintaining growth and keeping your taxes down. Pick a program that you feel comfortable with so when you need money, you will know how to withdraw with minimal downside.