How to Get Rich and Stay Rich in Retirement
19 September 2006I just ran across one of the better articles I’ve seen on the subject of retirement planning over on SmartMoney. It’s great for people who are interested in an overview of the various issues they’ll face in retirement planning – if I had to recommend a “how to get started” article for someone older than 50 and approaching retirement, I think this would be it. A lot of the topics it touches on have been discussed in this blog before, but it did raise a couple of interesting points that I haven’t talked about. One was this tip about how to withdraw your money:
Withdrawing money from a retirement stash can involve as much strategy as building it. One tip from planners: Each year liquidate all the assets you’ll need for the year in one fell swoop, and put them in a low-fee money-market fund. Doing so will cut down the costs associated with selling off securities. It’ll also help you resist any temptation to time the stock market — or to pull money out in a panic during a market dip.
That can be a pretty good idea – you get interest on your money for the whole year that way, but you do sacrifice some gains. I think a better strategy if you’re disciplined would be to take out a set amount each month, period. If you’re familiar with investing, you may have heard of something called “dollar cost averaging.” It’s an idea that you can avoid the swings in the market by putting in a set amount of money each month – sometimes you’ll buy stocks cheaply, sometimes expensively, but over time you’ll hit an average and not have to worry about ups and downs. The same thing works in reverse when you’re taking money out, as long as you can avoid temptation. And that way you don’t have to park the money in a relatively low-yield account for a year.
The article also talks about a way to take advantage of your retirement / non-retirement account to avoid taxes:
Keep taxes in mind as you plan withdrawals. If the lion’s share of your savings is in tax-deferred accounts, like 401(k) plans or IRAs, you could find yourself paying taxes at the same rate as when you were collecting a paycheck. And when you reach age 70 1/2, tax laws require you to take annual distributions that may be larger than you actually need; that, in turn, could push you into an even higher bracket. While conventional wisdom advises retirees to live off after-tax savings before tapping tax-deferred accounts, planner David Yeske notes that many retirees could find themselves getting smacked with higher taxes in their later years, when other expenses like medical bills may make them harder to bear. But if you’ve got substantial savings in accounts funded with after-tax dollars, including Roth IRAs, you’ll have the flexibility to lower your tax bills. Yeske’s approach: Draw down taxable and nontaxable accounts simultaneously. You could, for example, take out as much as you can from your IRA without climbing into a higher bracket, and then take the balance of your yearly nut from after-tax sources.
There is a big difference between tax-deferred and tax exempt. The idea of managing your tax bracket is a very good one – but one point the article doesn’t make applies to younger people: you can’t do this unless you have savings outside your 401(k). Many people have their entire retirement savings in there, because of the tax advantages. I’m not saying that you should ever save money outside of the 401(k) INSTEAD of in it. It’s not worth any tax savings down the line to lose that benefit. But if you can max out your 401(k), and save some extra money as well, you’ll be in a good position to control your tax bracket in retirement.
I recommend reading the whole thing - these are just a couple of good points that stood out to me as somewhat unique.
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