Draw Down Retirement Funds Carefully

| November 30, 2016
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One of the toughest decisions you'll make when retiring is deciding how much to withdraw annually from your retirement accounts, like your IRA and 401k plans. If you take too much out, you could spend your later retirement years relying on the help of relatives or with a much lower standard of living!

The amount you withdraw can be calculated based on: your life expectancy, expected long-term rate of return, expected inflation rate, and how much principal you want remaining at the end of your life. If you guess wrong on any of these variables you could risk running out of money too quickly. Yet, your life expectancy, rate of return, and inflation rate are hard to predict over such a long time, not to mention any stock market crashes. To help ensure you don’t run out of retirement assets, consider these strategies:

Use conservative estimates in your drawdown calculations. You can do this by adding a few years to your life expectancy, reducing your expected return a little, and increasing your inflation expectations.

This results in a lower withdrawal amount, but it also helps you avoid running out of money. Also, be careful if you get an answer telling you to take out more than 3% to 5% of your balance each year. 3-5% is a reasonable withdrawal amount IF you want your funds to last for several decades. That doesn't mean you can't take out more; but you need to be very confident of your assumptions before doing so.

Review your calculations every couple of years, especially during your early retirement years. If you find you are spending your retirement money too fast, you might have enough time and health to go back to work even if only part-time. If you find out too late in life that you're running out of assets; a job may not be an option.

Also, a buy and hold investor might need to keep about 3-5 years of living expenses in short term investments just in case something unexpected comes up, like a market crash. Then they won’t have to touch their investments for at least 3-5 years giving them time to recover.

We like our approach - a tactical model with an exit strategy from the stock market if things get too risky. Our statistical research shows that in any 6 month time frame, on our 70/30% stock/bond model, there is a 95% chance the range of returns will be within 15% to -4%. This can allow you to be more fully invested instead of so much in short term cash.

The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.

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