Withdrawals From Retirement Account
It can be a new and overwhelming experience transitioning from paychecks to taking money out of your retirement accounts. Let’s go over some of the best withdrawal strategies and rules of thumb.
John Stillman: Hello and welcome to another edition of Wright Money Tips on John Stillman alongside Isaac Wright chartered financial consultant and president of Financial dynamics and associates serving you in the greater Richmond area.
John Stillman: If you're not already listening to this on the website, you can find Isaac online at wrightandmoneytips.com. That's right with a W like Isaac's last name Isaac. Isaac what's happening? How are you?
Isaac Wright: Good John doing, I tell you man, this spring of course everybody was complaining about the wet and the cold literally in the first couple two, three weeks here of spring. Everybody's complaining about the power, and you can't have it all. You have to enjoy what's in front of you sometimes but doing good man, excited about our show today kind of I think some good stuff to cover with the folk.
John Stillman: Well, we're going to talk about taking income, making withdrawals from your retirement accounts and what does that actually look like? Because I feel like a lot of people have gotten to the point where for the last 30 or 40 years, they'd been saving and investing.
John Stillman: And now you say, "All right, I have $782,000 in my 401k. I have another couple hundred thousand in IRA, is a little bit in a Roth over here, plenty of money in the bank, I think I'm ready to retire so the paychecks, I guess need to come from all this money that I've saved. But how do I do that? How much is too much?" How do we answer that question? How much can you take out from your retirement savings?
Isaac Wright: This may be a little bit of a longer podcast conversation today, but for people that do listen to this, you're going to get, I think some good insight because number one is you have many, all of us today have multiple different custodians, types of accounts that have been earmarked for retirement.
Isaac Wright: Whether it's again, Roth money, IRA money, 401ks, tax deferred, taxable the list goes on. So you have to figure out a how to build a net all that out to be able to gain the most money after tax.
Isaac Wright: But more importantly is the general rule of thumb that's been around for many years is how much money can I withdraw from my portfolio? And many people have heard rules like the 4% rule. People also say systematically outside of that rule are looking at ways to say, "Well, does that rule apply in today's low interest rate environment?"
Isaac Wright: Yes, we've had a little bit of a rate increase, but now you the Federal Reserve's basically come back and said they like to keep rates low for another year plus, and many retirees are saying, "Hey." It's kind of like you want to have your cake and eat it all to John.
Isaac Wright: So for all of you, many people say, "I want to be able to generate at least 3%, 4%, 5% off of my portfolio. I don't want to touch my principal, I want to pull it out from these certain accounts." I think today we can be able to break out some good ideas on what that all means and figure out what I would call the true aspects of withdrawals when it comes to your money that you're going to earmark for your retirement lifestyle.
John Stillman: You mentioned the 4% rule. Why don't you explain what that is? Because I think you're right a lot of people have heard of it, don't really know what it is, and then other people have assumed that, that's their guideline for withdrawing from their accounts, is that true or not?
Isaac Wright: Now simply put, it's basically a rule, it's been out for well over 20 plus years. William Bengen was the rule creator per se. And it said that basically when you retire, you have a very high probability of never running out of money. If you pull a total of 4% from all of your investible accounts that you would use for, let's say, lifestyle income.
Isaac Wright: And potentially adjusting that even though I see a lot of town's people even talk about the fact that you just supposed to pull a flat 4%. There've been some caveats to it now where you can adjust a little bit and a good market or a down market, but overall a 4% withdrawal strategy, knowing that if you were to live 30 years in retirement would give you a high probability of success. But I don't really know with what I'm seeing today, whether or not that's really the case.
John Stillman: So for somebody who has been taking 4% out of their retirement account, does that mean they need to scale back? What does that mean to the average person?
Isaac Wright: Well considering today's low interest rate environment that we've been in, even though the market's had a great 10 year plus run. If you look at some of the things that are out there today, I read a lot, and a lot of portfolio management teams at very respectable institutions have all generally said the following that they don't expect the market over the next 10 years to let's say average more than maybe 5%, 6% and also bonds.
Isaac Wright: And fixed income and what I call the lower end of the risk totem pole, be prepared to only be making maybe 2%, maybe 3% and the parameters of that, you have to deal with fluctuations of how bad the market may get in a year or two.
Isaac Wright: Depending on when you start that 4% rule, if you have a year where your first year to the market's down, and your account's down, 20, 30% will have a significant impact on whether or not that success of that 4% rule will play out.
Isaac Wright: Now, I'm not saying it's wrong, it's still a high probability that you may be able to make that happen, but you also and this is what we do here at our office, we may have to make some adjustments to that, and I always tell people it's like driving down the road, and you have a 30 year drive ahead of you, and the goal simply put is to not drive into the ditch.
Isaac Wright: But if you simply ascribe to one rule for a 30 year approach, and you don't have an adjustable way of maybe making some of those changes. One of the reasons people work with our farm and work with me individually is here at our office is the fact that they know that they have at least on an annual chassis, a meeting to address that exact topic so that's number one.
Isaac Wright: I also want to say this, number two, sometimes people think that 4% rule means they've literally can withdrawal 3, 4, 5% let's call it roughly in that zone and not touch principal, so I just want to be clear, the 4% rule means you're likely going to be drawing down your principal over time.
Isaac Wright: And a lot of people don't want that to happen again, can you have your cake and eat it too? So a lot of respects today's interest rates, if you're trying to accomplish that back when CDs were paying 4% or 5% or 6% no harm, no foul. We'll now you're lucky to get 2% If that.
Isaac Wright: I think most people realize that, "Well, I may just have to start getting comfortable with using principal." While a lot of people when it comes to the reality of that get nervous because they feel like they're drawn down on money that eventually may run out.
Isaac Wright: So I want to be clear that 4% rule that John, you mentioned here that we talked about in the past. It requires, in my opinion, some professional management to achieve the desired result of not running out of money and yes, it may sound like a sales ploy to come in and see me.
Isaac Wright: It can be me or anybody else, but you better have somebody that's helping you. If you're doing it yourself, you better have a good system in place, and a lot of times as you get older, if you have a death, disability or stroke and life as you know it looks different, who's going to systematize the plan when you're no longer there? And that's why people choose to hire a financial or retirement professional that knows some of the things that we're covering today.
John Stillman: Well, what about for folks who are humming along and everything's fine. Maybe they're taking less than 4% out, have a nice pension, social security, their income is fine even at a more reasonable withdrawal rate, but then some big expense comes up.
John Stillman: You need to buy a new car and you don't want to finance it you want to pay cash for it or you got to have a new roof on the house. Now we're talking about a bigger withdrawal in that year from your retirement accounts. How do we account for that kind of stuff?
Isaac Wright: We have seen this happen from time to time, but we will have somebody come in and may have even worked with another advisory practice, but there are 4% or let's call it their overall withdrawal rate, was designed, what I would say to be able to pull x amount of dollars per year.
Isaac Wright: And what happens is this, so everybody listen, let's say you were to withdraw 4% on a million dollars, that's $40,000 a year and they divide that by 12 all right? So they're getting 33, 33 a month, let's say roughly all right.
Isaac Wright: That's going into their monthly budget to support all the other income that they have coming in and hopefully enough to cover all of their expenses, right? But what happens is this, you start mentally ascribing that money to be monthly, and you are going to have other onetime expenses.
Isaac Wright: And next thing you know, what you ascribed to a $40,000 amount may now be $60 or $80,000 because you have things that you don't know that you don't know and that may not be every year. So this is what we do, we will sit down and adjust for that and run a new scenario based, let's call it probability of whether or not that money will last you 10, 15, 20,30 years again.
Isaac Wright: But that's why people like to have somebody to be able to talk to about that because it can uneasy. But John, I'm glad we're having a conversation about this is because I've said this for many, many years. It's the small hinges that swing the larger doors and why would you even want to work with somebody that's a financial planner, a retirement professional, I think we've covered enough today.
Isaac Wright: I want people to realize is we kind of close up the podcast today. Be careful of a few things. Number one is a withdrawal rate means you're likely going to go into principal and if you don't, you may have to adjust that withdrawal rate to be lower.
Isaac Wright: You also have to what I call understand the level of volatility, how much risk are you taking to achieve a desired withdrawal rate? The lower the risk may be the more consistent that withdrawal rate is likely to be and then I would say finally on top of that is do not go the route of simply having that money divided out by 12 and supplementing that as monthly income you are going to have other onetime expenses.
Isaac Wright: We have a approach at our firm called our complete planning review process that takes all of what we've covered today, and we build out and maintain a plan for you. So if you have any concerns, reach out, give us a call at 7779999. If you listen here locally in Richmond, we have a brand new office right in Midlothian, the intersection of 288 and Powhite Parkway.
Isaac Wright: We're finding many people coming in because a, of what we've covered and b, literally the social security offices beside us. But I just want people to know how committed we are to this and John, again, this may have been a little longer in the tooth, but we wanted to be clear about some of the concerns we're seeing when it comes to how in the world to take money out of a lump sum and turning into income where I feel comfortable about what I'm taking.
John Stillman: 8047779999 is that number to call if you'd like to get in touch with Isaac and his team, maybe you're not sure how much you need to have saved in the first place or maybe you feel pretty good about what you have saved, and you just need some help figuring out how to withdraw, how much to withdraw, what are the tax implications of all those withdrawals and how do you make sure you don't withdrawal so much that you end up running out of money down toward the end of your life.
John Stillman: So you'd like some help reach out to Isaac and the team. 7779999 thanks for tuning in, we'll talk with you again real soon right here on wright money tips.
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