Designing A Smart Retirement Income Strategy—5 Questions To Ask

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Designing A Smart Retirement Income Strategy—5 Questions To Ask

You’ve spent years building up your retirement savings, but what comes next is an even bigger challenge: Turning that savings into an income stream that will last as long as you need it to.

To design an effective retirement income strategy, you must consider some key factors and understand your long-term spending needs. Here are five questions to ask that will help you make smart decisions and develop your strategy.

1) How much should I withdraw each year?

How much of your total savings you withdraw each year of retirement depends on how much you have, how much you spend, your other income sources and your financial goals. If you want to leave an inheritance to family members, for example, you will probably withdraw less each year than if you hope to deplete your savings over your lifetime.

Some retirees use what’s called the “4 percent rule,” which says that you can spend 4 percent of your initial savings balance each year of retirement, adjusted for inflation, and your savings should last 30 years. However, that guideline assumes that your portfolio is generating a decent rate of return. How much you decide to withdraw each year should depend on your personal situation and your portfolio’s performance. Keep in mind that spending often fluctuates over the course of retirement, so you may need to adjust your plan accordingly.

2) How should my assets be allocated?

Your investment performance during retirement will affect how long your savings last. Retirees typically reduce their exposure to investment risk gradually over the course of retirement by moving a greater share of their portfolio out of higher risk, higher return investments into certificates of deposit (CDs) or other more conservative savings and investment options. But be careful not to become too conservative in your investing too soon, however, or you risk that your portfolio’s value won’t keep up with inflation.

How you allocate your retirement portfolio will also depend on your goals. Generally speaking, the sooner you need your assets the less risk you should assume.

3) Which accounts should I be withdrawing from?

You may have several types of accounts, such as an employersponsored retirement plan, a traditional individual retirement account (IRA), a Roth IRA and/or a taxable brokerage account. Distributions from each type of account carry their own tax consequences.

For example, you typically pay ordinary income tax on distributions from your traditional IRA while you may pay capital gains tax on all realized gains in your taxable brokerage account. Distributions from a Roth account are normally tax-free, since you received no upfront tax break when you put money into the Roth.

Once you turn 70½, you must take annual required minimum distributions (RMDs) from your traditional IRA—so that may be the first account you tap into once you reach that age.

You may want to withdraw from more than one type of account in the same year in order to potentially optimize your tax situation. Doing a so-called Roth conversion of some of your traditional IRA savings may also reduce your long-term tax obligations. You should always consult your CPA or a tax specialist to determine your most favorable options.

4) When should I claim Social Security?

The size of your monthly Social Security retirement benefit will determine how much income you need to generate from personal savings. You can start claiming Social Security as early as age 62, but you will receive a reduced monthly benefit if you do so. Instead, consider waiting until at least full retirement age—which is age 66 for people born between 1943 and 1954 and age 67 for those born in 1960 or later—to increase your benefit amount. You can boost your benefit amount even further by delaying benefits until age 70, which can make sense for people who expect to live well into their 80s and beyond.

5) Am I prepared for unpredictable large expenses?

Beyond planning for regular expenses in retirement—such as housing, utilities, food and entertainment—you will need to have a cushion in case of unexpected large expenses, such as a large health care bill, a new car or long-term care.

Having long-term care insurance or an annuity may help cover certain unexpected costs you may incur.

An advisor with BOK Financial Advisors can help you evaluate your retirement sources and develop an income strategy that makes sense based on your personal situation and long-term goals.


Prepared by WSJ Custom Studios

© 2017 BOK Financial. Services provided by BOKF, NA. Member FDIC. Securities, insurance and advisory services offered through BOK Financial Securities, Inc., member FINRA/SIPC and a subsidiary of BOK Financial Corporation. Services may be offered under our trade name, BOK Financial Advisors NOT FDIC INSURED | NO BANK GUARANTEE | MAY LOSE VALUE

The opinions expressed herein reflect the judgment of the author at this date and are subject to change without notice and are not a complete analysis of any sector, industry or security. The content in this document is for informational and educational purposes only and does not constitute legal, tax or investment advice. Always consult with a qualified financial professional, accountant or lawyer for legal, tax and investment advice.

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