After you’ve retired, paychecks stop and sources of guaranteed income (annuity, Social Security, etc.) kick in. If there’s a shortfall, though, you’ll need to draw down investment assets.
How can you convert your investments to spending cash?
1. Determine how much you’ll need. If you need $80,000 per year, for example, and you have $50,000 from other income, you’ll need to draw down $30,000 a year from your portfolio. Most financial planners caution against taking more than 6 percent of your portfolio per year, in the early years of your retirement. Some put the cap at 5 percent or even 4 percent. If you deplete your portfolio too rapidly, it might run dry during a long retirement.
2. Decide which pocket to pick first. You may well have money inside an IRA or other tax-deferred account as well as taxable funds in the bank, at a brokerage firm, in directly owned mutual funds, etc. Where should your retirement spending money come from? Generally, you’re better off tapping your taxable accounts and letting your tax-deferred account keep accumulating. The longer you defer taxes, the better. After the year you reach age 70 1/2, you’ll be required to take certain amounts from your tax-deferred plan.
However, you may want to take some money from a tax-deferred plan even before then. If you’re in the lowest 15 percent tax bracket, it may pay to take money from your IRA and pay tax at this low rate, rather than pay tax later at more. Check with your tax pro. (You won’t want to take money from your IRA before age 59 1/2, and pay a 10 percent penalty, if you can help it.)
3. Decide what to sell, if necessary. Assuming you’re taking cash from your taxable accounts first, you’ll probably want to spend any interest and dividends generated by those accounts. However, at today’s low yields, you might still be short of money and have to liquidate other securities.
There’s no “right choice” in terms of what to sell but here’s one approach. Choose your most conservative mutual fund, which might be a bond fund or a fund holding dividend-paying stocks. Ask the fund to automatically transfer a certain amount ($2,000 per month, for example) into your checking account. This technique gives you a ready flow of cash while keeping your more aggressive stock market investments in place. Long-term, you’ll likely get the highest returns from growth-oriented stocks.