By LouAnn Schulfer, AWMA®, AIF®
Accredited Wealth Management Advisor®
Accredited Investment Fiduciary®
Most people are familiar with how to save for retirement, and do a good job at it. Making regular contributions to your 401k, taking full advantage of your employer’s matching dollars, adding money to IRA’s or ROTH IRA’s and reducing or eliminating personal debt are all sound components of building your retirement nest egg. Most people though, do not fully understand how different “accumulation” is from “distribution”. It takes an entirely different strategy and set of skills to plan for and execute a successful retirement income distribution plan. I could write pages on this topic alone, but here I will hit on the high points.
During the accumulation phase, it is fairly easy to figure out the components to a successful equation. $___ of contribution X number of years X expected annual rate of return = your end goal, which is total dollars accumulated by a specified retirement date. Distribution is completely different. The big unknown for all of us is how long we need our money to last. In other words, how long will you and your spouse live? Consider that you are no longer adding to your investments, but rather taking money from your stockpile. During the accumulation phase, dips in the market are opportunities to “buy low”. In the distribution phase, however, if your investments lose value and you are taking money from them, this compounds the negative effect on your balance. Furthermore, there is a stark difference in prudent management of an accumulated nest egg versus one that is still growing toward the goal of retirement. For example, a 10% loss on $50,000 is a $5,000 net effect, while a 10% loss on $500,000 has a $50,000 net effect. While accumulating money, you may have more time to make up that 10% loss, and may need to take on more “risk” for your money to grow to meet your end goal. While in distribution, time is no longer on your side. If your nest egg has already been built and your accumulation goal has been met, it is wise to manage your risk.
Taxation during accumulation is not a consideration, as retirement accounts are tax deferred. Knowing your taxation during retirement income distribution, however, is very important. From your traditional retirement accounts, there is income tax on distributions, penalties on early withdrawal if before 59 ½ and required minimum distributions at 70 ½, as well as taxation rules on social security. Understand your tax brackets if you plan to make a large withdrawal, for example, to purchase a car. Most people understand how important it is to diversify and do so with an asset allocation plan in their accumulation vehicles. In distribution, diversification should include more than your asset allocation. It is prudent to diversify among different types of investments and understand how they correlate to each other in an income plan.
Recognize that distribution is a new chapter in your life. Understand how the rules work and utilize best practices in your strategies to maximize enjoyment of your golden years.
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