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Do you have a retirement spending plan?

Saving and investing are just the first steps in retirement planning — creating a strategy to draw down that money is the next challenge. These tips can help.


YOU’VE WORKED HARD, SAVED, INVESTED — all with the goal of having enough to live the retirement life you want. As the day approaches, are you looking at the balances of your various accounts and thinking, now what?


How much of your savings can you afford to spend if you want that money to last as long as you live? Which accounts should you consider drawing from first — your 401(k) plan account, your IRA, your taxable accounts?


You may have heard some broad guidelines about the “right” amount to withdraw each year, and the optimal order for tapping your various sources of income. While there are often kernels of truth in these rules of thumb, they generally gloss over the fact that everybody’s retirement is different — and much too important to be guided by a formula. “You need to come up with a plan for drawing down your income that’s based on your own unique priorities and goals,” says Ben Storey, director, Retirement Research & Insights, Bank of America. “Creating that plan requires you to be thoughtful about what your expenses are going to be and about how you’ll allocate your resources.”


As you consider your personal equation for drawing down your retirement income, three primary questions are worth asking:


1. How much can I spend each year without jeopardizing my savings?

According to one oft-quoted rule of thumb, retirees should look at tapping into about 4% of their wealth annually. But that’s just a rough guideline, and one that doesn’t take into account variables such as the age at which you’re retiring and whether your income needs will change as you age, Storey says. “The younger you are, the lower the percentage you’ll be able to spend each year if you want your savings to last throughout your lifetime,” he says.


Ben Storey headshot
“The younger you are, the lower the percentage you’ll be able to spend each year if you want your savings to last throughout your lifetime.”

— Ben Storey, Director, Retirement Research & Insights, Bank of America

Because the likelihood of your money lasting depends on a delicate balance between the rate at which your investments appreciate and the rate at which you withdraw income from them — to say nothing of inflation — your withdrawal rate is in some ways a reflection of your confidence that your investments will continue to grow, or at least not shrink relative to your withdrawals. If you think your money might not last, and you're comfortable investing more aggressively, you might decide to take a little more income each year. On the other hand, if you desire less risk, you might opt for a lower withdrawal rate. It is important to remember that investing involves risk, and there is always the potential for losing money when investing in securities.


Other factors may come into play as well. Some years you might plan to withdraw more in order to realize a long-cherished goal, like travel, for instance. Or you might have healthcare needs that dictate a higher spending rate. Your plans should be flexible enough to accommodate a variety of needs at different times.


2. What’s the order in which I should tap into my retirement accounts?

In this case, the conventional wisdom goes that you should withdraw from your taxable accounts first, then tax-deferred, then tax-free. That’s because the money you take from a taxable account (such as a brokerage account) is likely to be taxed at the rate for capital gains or qualified dividends, which varies depending on your tax bracket. It’s generally a lower rate than what you’d pay on ordinary income from 401(k) plans, traditional IRAs and other tax-deferred savings. Tapping the taxable accounts first gives the other accounts the potential to continue growing, shielded from current taxes.


“Tapping taxable accounts first gives the other accounts the potential to continue growing, shielded from current taxes.”

— Ben Storey, Director, Retirement Research & Insights, Bank of America

Even if you don’t feel ready to start withdrawing funds from your traditional IRAs and qualified retirement plans, the government generally requires you to do so once you reach age 72.1 The amounts of these required minimum distributions, or RMDs, will vary from year to year, depending on the value of your retirement accounts and your age. Failing to take an RMD, or taking an insufficient amount, can result in costly additional taxes. However, if you are still working past the required age to start withdrawing, you may not have to take annual RMDs from your employer’s qualified retirement plan accounts until the year you retire, unless you own more than 5% of the employer’s stock.1 RMDs are one reason to consider drawing from those accounts before taking federal tax-free qualified distributions2 from a Roth IRA. Roth IRAs don’t have RMDs, so you can keep money — and potential growth — in your account. What’s more, if there’s anything left over in your Roth IRA, it can be passed on to your heirs, who may be able to draw federal (and potentially state and local) tax-free income from it during their lifetimes.


While the guidelines for withdrawing income offer a reasonable starting point, Storey says, you’ll also need to look at your unique situation. “It’s helpful to have some flexibility in the way your income might be taxed,” he says. For example, if for some reason you were going to be in a higher than usual tax bracket one year — if you realized a significant gain from selling a business but you still needed additional income, say — you might like to have the option to draw federal (and potentially state and local) tax-free income from a Roth IRA.


“I worked with a couple recently who could have been receiving an additional $1,400 a month in spousal benefits for four years. That adds up”

— Ben Storey, Director, Retirement Research & Insights, Bank of America

3. When should I claim Social Security benefits?

Delaying the start of your benefits until age 70 may give you a larger monthly payment than if you claim them earlier. But, Storey notes, “after considering all of their options, some people might decide not to wait.” If you have a health condition that could limit your life span, for instance, it could make sense to start drawing your Social Security income immediately. And depending upon your situation, drawing this income sooner could help you cover essential expenses during retirement, limiting the need to tap other savings. Complex rules about spousal benefits could also come into play, he adds. “I worked with a couple recently who almost missed out on more than $67,000 in spousal benefits. The husband had recently started collecting his maximum retirement benefits at age 70, and his wife, age 66, was also planning to wait until age 70 to maximize her retirement benefits. Based on the fact that she was full retirement age (for Social Security purposes)3 and was born before January 2, 1954, she was eligible for $1,400 a month in spousal benefits for four years while she waited until age 70 to begin collecting her retirement benefits,” he says. “That adds up.”


As you work out a plan for drawing down your retirement income, “it’s important to work with your financial advisor and your tax advisor to know all your options, and to take your personal situation into account,” Storey says. “You can look at rules of thumb to get a general idea, but you’re different from anyone else, and your differences need to be factored into any thoughtful decision.”


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1 The required beginning date for RMDs is age 72 for those born after June 30, 1949. You may defer your first RMD until April 1 in the year after you turn age 72, but then you’d be required to take two distributions in that year. Failure to take all or part of an RMD results in a 50% additional tax applicable to the amount of the RMD not withdrawn. Consult your tax advisor for more information on your personal circumstances.

2 In order for a withdrawal to be considered a “qualified distribution,” at least five years must have elapsed from the first day of the year in which you made your initial contribution or Roth conversion, if earlier, and you must be age 59 ½ or older, disabled or deceased. If you take a non-qualified distribution, any investment returns are subject to regular income tax plus a 10% additional federal tax if you are under the age of 59 ½, unless an exception applies.

3 You can begin receiving Social Security retirement benefits as early as age 62, but the benefit amount you would receive is less than the amount you would receive if you were to wait until your full retirement age to begin collecting. The year and month you reach full retirement age — when you become eligible for unreduced Social Security retirement benefits — depends on the year you were born. To find your full retirement age, go to

Merrill, its affiliates, and financial advisors do not provide legal, tax, or accounting advice. You should consult your legal and/or tax advisors before making any financial decisions.


This material should be regarded as educational information on Social Security and is not intended to provide specific advice. If you have questions regarding your particular situation, you should contact the Social Security Administration and/or your legal advisors.

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