Turning Retirement Savings into a Sustainable Income

Turning Retirement Savings into a Sustainable Income:

Throughout your career, you may have accumulated funds in retirement accounts such as IRAs, 401(k)s, and taxable investments. The challenge in retirement is efficiently converting those savings into a steady income stream to maintain your desired lifestyle.

Managing Required Minimum Distributions (RMDs)

Retirees cannot keep funds in tax-deferred accounts indefinitely. The law mandates required minimum distributions (RMDs) starting by April 1 of the year following the year you turn 73 (or 75 for those reaching 73 after December 31, 2032). Employer-sponsored retirement plans follow similar rules, but RMDs may be deferred if you're still working. Roth IRAs are exempt from lifetime RMDs.

Missing RMD deadlines can result in significant penalties—typically 25% of the amount not withdrawn (reduced to 10% if corrected promptly). Ensuring compliance with RMD rules is crucial when structuring your withdrawal strategy.

Choosing the Right Withdrawal Strategy

The sustainability of your retirement depends on your assets, investment decisions, and withdrawal rate—the percentage of your portfolio you withdraw annually. Finding a balance is key: withdrawing too much early on may deplete your savings, while being overly cautious could limit your quality of life.

A traditional rule suggested a 4% annual withdrawal from a balanced portfolio to sustain income for 30 years. However, individual factors such as market performance, asset allocation, and personal financial goals may necessitate a different approach. Consulting a financial professional can help tailor a withdrawal strategy that aligns with your needs.

Optimizing the Order of Withdrawals

Your retirement funds may be spread across taxable accounts (e.g., brokerage accounts), tax-deferred accounts (e.g., traditional IRAs, 401(k)s), and tax-free accounts (e.g., Roth IRAs). The order in which you withdraw from these accounts affects your tax burden and long-term wealth preservation.

A common approach prioritizes taxable account withdrawals first, followed by tax-deferred accounts, and finally, tax-free accounts. This strategy allows tax-advantaged funds to continue growing longer. However, those with estate planning goals might adjust this order to maximize the value passed to beneficiaries.

Exploring Annuity Income Options

If you have an annuity, you can convert it into a retirement income stream through various options. One approach is systematic withdrawals, which offer flexibility but may risk depleting funds unless a guaranteed income rider is included.

Alternatively, annuitization converts the annuity’s value into guaranteed periodic payments, which can last a lifetime, a fixed term, or extend to a spouse. The amount received depends on factors such as the annuity’s balance, payout structure, and age at withdrawal.

Each annuity payment includes a portion of tax-free return on investment and taxable earnings. Withdrawals before age 59½ may incur a 10% penalty unless an exception applies.

Key Takeaways for a Secure Retirement

Ensuring financial stability in retirement requires a well-structured withdrawal plan that accounts for RMDs, tax implications, and asset longevity. A strategic approach—possibly with professional guidance—can help you optimize your income while preserving wealth for the future.