Creating Your Retirement PaycheckYou've spent years working and saving for retirement. Now it's time to plan how you will generate and manage your income. There are a number of factors to consider as you update your financial strategy for retirement.
What to withdraw and where to withdraw it from – and when?Your retirement "paycheck" has to be large enough to help meet expenses yet small enough so you won't run out of money prematurely. Seems simple – but your withdrawal strategy must take into account some highly complex variables. For example:
Taking distributions from your retirement savings strategicallyYou may have savings invested in a number of different accounts: some that are taxable, tax-deferred (Traditional IRAs, 401(k)s), or potentially tax-free (Roth IRAs). Each type of account has its own withdrawal and tax rules. Additionally, you will want to find the right withdrawal rate to make your savings last.
After taking any required minimum distributions, consider using Social Security funds first, then withdrawing from taxable investment accounts. Withdraw from your retirement accounts, such as IRAs and other tax-deferred accounts, last. If you have a pension, you will need to determine if you want to receive it as monthly benefits, a lump-sum distribution, or a combination of both.
How to withdrawOnce you've determined which accounts to withdraw from and when, you will need to determine how you will use your retirement savings to create your retirement paycheck.
Here are four simplified examples of some popular approaches for paying yourself in retirement:
Fixed Payments: Fixed payments are a fixed dollar amount on a regular schedule. With fixed payments, the same amount is drawn from principal as well as interest and dividends, on a regular schedule that you choose. The dollar amount remains constant unless you make cost-of-living adjustments.
Percentage of Asset Value: This is a percentage of your assets paid regularly. With this option, a percentage of your portfolio assets are paid on a regular schedule. The percentage is selected to help ensure that the payout is sustainable for your lifetime. Dollar amount varies as your asset value changes due to market conditions.
Earnings Only: You can choose to take interest and dividends only – no reduction of principal. Payments are comprised of interest and dividends earned during the subsequent period by stocks and bonds, leaving your principal untouched.
Systematic Withdrawals and Rebalancing: You can withdraw regular payments from an actively managed account. Payments are withdrawn regularly and the portfolio is periodically rebalanced to maintain desired asset allocation.
Depending on your needs and retirement income sources, you may want to explore more complex strategies. These may include such concepts as "collared withdrawals," "buckets," and "pools." Also, if you have multiple accounts at a number of financial institutions, it may make sense to consolidate your savings into one account to make it easier to manage them.
Your goal is to cover your monthly expenses, minimize your income taxes, and keep as much money as possible working tax-deferred for your future. A Wells Fargo Funds Investment Specialist can help you decide how to prioritize the order in which you take withdrawals from these accounts, tell you about distributions rules, and recommend distribution amounts. They can also help you stay informed, and make any necessary adjustments if your circumstances change. To determine the appropriate tax strategy for your situation, we suggest that you consult with your tax advisor.
To talk to a Wells Fargo Funds Investment Specialist, call