Attitude and circumstances jointly impact your optimal distribution strategies. Distribution is difficult, emotionally, and logistically. Moving parts need to function in harmony that can become disjointed, leaving your dedicated efforts toward saving and accumulating assets with less than desired retirement outcomes.
There are three common attitudes toward distribution for most families. There are individuals fearful of running out of money before they pass away. Many “good savers” find they don’t need to take additional income at retirement and are opposed to removing funds from their accounts. The final generality is families who cannot imagine taking funds out after dedicating 30 or more years to building the balance. The IRS is the last straw as distributions are forced at age 72 from retirement accounts.
Circumstances vary for each family. Academic research is essential, but you need to be aware that the investigation is done on the average – the extremes on both ends of the financial spectrum – rather than you specifically. Reading about the weather in Scottsdale while vacationing in Alaska may provide interest but far from useful data regarding what to wear outside. Distribution planning must be about you, your family, your needs and wants, and what your previous financial efforts allow.
There are three base strategies we utilize in our office. The classic distribution method allows people to take a fixed percentage out of their account every year – without running out of money – and adjusts for inflation. The “bridge strategy” allows people to increase their distributions until another source of funds temporarily – Social Security is the best example – begins to flow. The spend-down is for families who want to eliminate their estate near their last days of life. The latter is very difficult almost impossible to perfect, but the objective is vital in making financial decisions.
Examining your unique situation, your task is to address how much income you need to maintain your standard of living after leaving the workforce. We recommend a retirement budget that includes both fixed expenses as well as social expenses. The key is starting with what you need rather than what you have to use.
The second step is to determine the asset base you have along with current and future retirement income sources. Optimal planning may have you taking out of one fund first and your neighbor using a different strategy. Situations are all unique, and your retirement happiness is dependent upon your recognition that one-size does not fit all.
Once you know what you need, examine what you have to utilize, then you can begin to move the chess pieces around to maximize your best strategy. Investments need to be examined for risk and volatility, fees and expenses, taxation today and tomorrow and understand the impact arising from inflation. You will need to have a reasonable handle on taxation to maximize your situation. This is not just about assets. Distribution is about income, and that is a significant shift in mindset from your years as a saver.
Disclaimer: Joseph Clark is a Certified Financial Planner™ and the Managing Partner of Financial Enhancement Group, LLC an SEC Registered Investment Advisor. He is the host of “Consider This Program” found on WIBC Saturday mornings from 6-7a.m. as well as a podcast of the same name. Joe served as an Adjunct Assistant Professor at Purdue University where he taught the capstone course for a degree in Financial Counseling and Planning.
Securities offered through World Equity Group, Inc., Member FINRA/SIPC, and a Registered Investment Advisor. Investment Advisory services offered through Financial Enhancement Group (FEG) or World Equity Group. FEG is not owned or controlled by World Equity Group.
Joseph Clark and World Equity Group, Inc. do not provide tax or legal advice. For tax advice consult with a qualified tax professional. For legal advice consult with an attorney.