Ross Polking, CFP®, AIF®, MBA®

You’ve spent your career saving for retirement. Your wealth enhancement strategy was spot on, and you’ve finally come to the next exciting journey. It may seem there’s little left to do except enjoy the accumulated fruit of your labor. But in actuality, without as many—or any—income sources, it becomes even more important to employ the right withdrawal strategy in order to maximize portfolio sustainability and mitigate tax concerns.

A wealth enhancement withdrawal strategy addresses how to deploy your money in a way that funds lifestyle expenses and maintains a desired standard of living all the while enabling portfolio longevity. This could be tied to a financial goal you may have established or it could simply be a standard your level of accumulation can accommodate. Either way, a solid withdrawal strategy typically includes three facets:

  1. Comfortable Living—Your strategy needs to allow for a withdrawal rate that provides you with approximately 70–80% of your preretirement monthly income. This facet of the withdrawal strategy answers the question, “What do I need to withdraw to maintain or enhance my standard of living?”
  2. Portfolio Sustainability—People are living longer. In order for your assets to remain intact during an extended retirement period, your withdrawal strategy should draw out assets systematically but with flexibility so that market returns—and other variables that help enhance the growth of those assets—will continue to benefit your portfolio. This facet answers the question, “Can I withdraw in such a way that allows remaining assets to continue to grow over time?”
  3. Tax Mitigation—You need to remember that every dollar utilized in retirement is taxed differently. Pulling a dollar out of a 401(k) or an IRA—which is taxed upon withdrawal—should be weighed against pulling a dollar from a Roth IRA or non-qualified account.. Understanding and properly managing taxes is critical. This facet answers the question, “Can I withdraw at the right time and from the right source so that I avoid unnecessary taxes?”

There are a few additional withdrawal rules of thumb to consider. It is prudent to withdraw from assets first that are taxed least, which usually means cash, followed by fixed income, and finally tax-deferred accounts. Just keep in mind that blending and balancing these different sources and managing the taxable impact can prove challenging on your own. Also, retirees should use as their benchmark a 4 to 4.5% withdrawal rate from their assets per year, adjusted for inflation.

At the end of the day, the best advice is that you plan, plan, and plan. Withdrawal strategies are not auto-piloted, “set it and forget it” approaches—they must be continually means-tested based upon an individual’s needs, tax bracket and portfolio performance. Assets must remain fully diversified. Cash flow must be understood and managed accordingly. That’s why it’s important to get your investment advisor and accountant communicating directly with one another. If you do, you’ll find that—once you retire—a solid wealth enhancement withdrawal strategy provides much needed confidence and peace of mind.

PLEASE NOTE LIMITATIONS: Please see Important Educational Disclosure Information and the limitations of any ranking/recognitions, at www.fostergrp.com\disclosures. A copy of our current written disclosure statement as set forth on Part 2A of Form ADV is available at www.adviserinfo.sec.gov.