It can take years to build up a retirement nest egg. However, without a prudent distribution strategy in place, funds can drain pretty quickly. About half of larger employers that sponsor a 401(k) plan offer a systematic withdrawal option to help retirees establish an automatic stream of income. If that’s not an option with your plan, or if you have a wide array of retirement accounts from which to draw income, you may find it beneficial to develop a coordinated income plan.
Some financial advisors recommend what’s referred to as a “bucket strategy.” This simply means that you assign different retirement income sources to different buckets, usually stratified by a timeline. For example, one bucket may be for immediate income or emergencies, with enough funds to cover expenses for a few months. It would need to be allocated to an easily liquidated account, such as a savings or money market account.
Then you may want to assign a bucket that can provide income over a short timeframe, such as one to five years. This may be an effective way to create a “bridge” between the time you want to retire and the delay of drawing Social Security benefits to help maximize the amount to which you can receive. This short-term bucket might have assets invested in short-duration fixed-income securities, such as Treasury, state and municipal bonds.
As you enter the middle of your retirement, you may want to have a third bucket for providing income over the next five to 10 years. This bucket may be composed of longer-term bonds and perhaps some reliable yield stocks, such as utilities. The last bucket is designed to provide income for later retirement years. This may hold some stocks that perform better over the long term with a strong track record for paying dividends. By waiting until later in retirement to tap this bucket, these securities have the opportunity to grow undeterred by taxes and withdrawals.
Retirees concerned about outliving their buckets may want to consider adding fixed annuities to their overall financial strategy. An immediate annuity can provide immediate payouts early on in retirement, or a deferred annuity can be scheduled to distribute payments at a later date. Either way, both types of annuities are insurance contracts that guarantee a stream of income for a specific period of time or even for life. We suggest that you work with a financial professional who can help you determine if an annuity would be an appropriate fit for your financial strategy and can recommend which type of annuity would be suitable for your unique situation. We can work with you to help create a financial strategy designed to help you meet your goals; just give us a call.
Downsizing a Stock Portfolio
It’s important to remember that whenever you sell individual stocks or securities, it normally results in a capital gain or loss, which can affect your income taxes.
A capital gain or loss is the difference between the amount paid for the asset and the amount for which it eventually is sold. The tax rate on a net capital gain generally is determined by how long the asset was owned and the taxpayer’s income, but it ranges between 0 percent and 20 percent. However, there are certain types of net capital gains that can trigger a 25 percent or 28 percent tax rate.
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