Some Distribution Strategies From Retirement Accounts

This Week's Quote:

Winning doesn't always mean being first.  Winning means you're doing better than you've done before.
                                  -Bonnie Blair, Speed Skater

Over a dozen options exist for withdrawing retirement funds.  Many of these options have a common goal of being sure your retirement funds don’t “expire” before you do.  However, many ever-changing variables may influence your decision model for optimizing withdrawal strategies.  These variables include inflation, market return, the timing of your returns, asset allocations, and life expectancy – all of which may be continually changing and evolving.  Most of these variables, you do not have any control over.  So, it is not unlikely through little fault of your own, to end up with a shortfall OR a large amount of unexpended funds TikTok for business.
 
One of the more well-known distribution methods is the “4% rule.”  In the first year, 4% is withdrawn and then thereafter that dollar amount plus more to account for annual inflation is disbursed.  Other methods include variations of using the “dynamic spending” rules – where your withdrawals are computed based upon the change in your portfolio performances.  In this model, your withdrawals go up and down with the value of your portfolio.  That could be interesting to say the least. 

                                  -Mark Bradstreet

Is there a better or best strategy for withdrawing money from retirement savings? I’m familiar with the 4% rule and RMDs. But there seem to be dozens of different ways to tap a nest egg in later life. Do you have a favorite?
 
There might not be a best way, but there is, I think, a safer way.
 
You’re right: A person getting ready to pull money from retirement savings can choose from among a dozen or more methods. The so-called 4% rule is among the best known. Here, you withdraw about 4% of your nest egg in the first year, and then that dollar amount plus more to account for inflation every year after that.
 
Or, you can use “dynamic spending rules,” in which withdrawals each year are tied to, and change with, your portfolio’s performance. If your nest egg rises in value, your withdrawal increases as well—and vice versa. Required minimum distributions, or RMDs, are an example of this: The same math (courtesy of the Internal Revenue Service) used to calculate annual withdrawals from tax-deferred accounts can be applied to your retirement savings as a whole.
 
These methods and others all have the same objective: making sure your nest egg doesn’t expire before you do. And all have the same shortcoming: Given the myriad variables involved (among them: life expectancy, market returns, the sequence of those returns, inflation, your assets and how they are allocated), there is still the chance that your savings could fall to disturbingly low levels—or, conversely, that you’ll die with piles of money unspent. (Yes, some people end up regretting that they didn’t enjoy their assets more and/or earlier.)
 
If you’re going the do-it-yourself route, I would recommend, first, getting a copy of “How Much Can I Spend in Retirement?” by Wade Pfau. Mr. Pfau, a professor of retirement income at the American College of Financial Services, examines thoroughly most of the major strategies for tapping a nest egg. (His most recent book, “Retirement Planning Guidebook,” places such withdrawals in a broader context.)

Second, spend time with Karsten Jeske, a chartered financial analyst and author of the Early Retirement Now blog, which focuses in large part on safe withdrawal rates. Note: Neither of these experts is for the financially faint of heart; some of their research and writing can be difficult to wade through. But the rewards can be considerable.
 
Again, all withdrawal strategies have their virtues and faults. As such, a safer path might be to put this decision on the back burner and focus, first, on establishing a “secure base of lifetime income,” says Joe Tomlinson, an actuary and financial planner.
 
Yes, your goal is not to run out of money in retirement. But we can divide that goal into two parts: not running out of money for essential expenses (like shelter, food and health insurance) and not running out of money for discretionary expenses, like travel. If you can cover the former with guaranteed sources of income—Social Security, a pension, an annuity, a reverse mortgage—then choosing the “With a secure base of income, the year-to-year variability [in withdrawals from retirement savings] is mitigated by the secure base,” he says.
 
Fortunately, there is a good book that lays out this very approach. “Don’t Go Broke in Retirement,” by Steve Vernon, a consulting research scholar at the Stanford Center on Longevity, looks at establishing, first, “retirement paychecks,” a reliable monthly income, and, second, setting up “retirement bonuses,” Mr. Vernon’s description for withdrawals from savings. (He prefers using RMDs and shows how the math would work for retirees age 60 and older.)
 
In short, a valuable read with lots of good examples—and a smart way to make sure your money lasts as long as you do.
 
I have a Social Security question. My wife will receive a larger benefit than I will—about $9,000 more annually. Does it matter which one of us claims our Social Security first?
 
It could matter a great deal.
 
So-called claiming strategies for spouses, in which a couple seeks to maximize their Social Security payouts over their lifetimes, have changed in recent years. Two of the most popular approaches—“file and suspend” and a “restricted application”—largely were eliminated as part of the Bipartisan Budget Act of 2015. That said, there are still options that couples should weigh before claiming benefits.
 
To start, I assume the figure you cite is based on your respective “full retirement ages.” That’s the age, according to the Social Security Administration, when a person can first collect an unreduced benefit. In your case, it could make sense for your wife—who, apparently, is the higher wage earner—to wait until she turns 70 to file for Social Security. Meantime, you could claim benefits at your full retirement age.

This approach offers several advantages. First, your wife will collect “delayed retirement credits,” which will result in the largest benefit possible for her as an individual and help boost your combined payout as a couple. Second, if your wife should die first, you would be eligible for her age-70 payout, the largest survivor benefit possible.
 
And third, if you claim benefits at full retirement age, the two of you could enjoy a monthly payment from Social Security while you’re waiting for your wife to file.
 
Of course, there are caveats. This approach tends to work best if you’re both in good health, about the same age and if your wife can, in fact, wait until 70 to file for benefits. Which is why it’s smart to take advantage of Social Security calculators that can account for such variables and help couples make these decisions.

Credit Given to:  Glenn Ruffenach. Published October 1, 2021 in the Wall Street Journal.

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This Week’s Author, Mark Bradstreet

-until next week.