Keeping your retirement goals top of mind is key to keeping your strategy on track, regardless of your age.
6 Considerations Before Drawing from Your Retirement Funds
You’ve diligently saved for decades, and now retirement is so close that you can taste it.
So call it quits and hit the beach, right? Not so fast. Before retirement, make sure you’ve considered the effects of taking retirement benefits like Social Security and withdrawing funds from your retirement accounts, as well as the potential advantages of waiting.
“Taking retirement benefits at the wrong time can be a costly mistake,” said Joe Correnti, senior vice president of brokerage product at Scottrade. “By figuring out the right time to draw down retirement assets, you can help ensure that you can sustain the lifestyle you choose well after you stop working.”
When is the right time to start drawing from your retirement accounts? For starters, everyone’s situation is different based on a wide range of factors including health, expected longevity, current retirement savings, and income needs in retirement. Also, you might start drawing from different sources at different times. Regardless of the right time for you, make sure you’ve considered these things before you withdraw away.
- How much longer will you work? Deciding when you will begin drawing income from your investment portfolio and Social Security will in part be determined by how much longer you want or are able to work. If you don’t feel like you are ready to leave the workforce or you think you’ll come up short in retirement, consider working longer if you can. Delaying retirement even by a few years will allow you to continue growing your portfolio, reduce the amount of time you’ll be drawing down on it, and boost your Social Security payout. Working longer or working part-time in retirement can help your savings, but very few people continue to work past age 70. Before you decide to extend your working years, think carefully about your long-term health and have a backup plan in case you’re unable to work down the road.
- Factor in Social Security: Figuring out when to access your retirement savings is, for many people, largely centered on when and how much money you plan to collect from Social Security. You can claim Social Security retirement benefits between the ages of 62 and 70. While you can elect to receive reduced benefits as early as age 62, you’re eligible to claim full benefits at your full retirement age (which ranges from 65 to 67, depending on your year of birth). If you wait longer to claim, your monthly benefit amount will increase even more. The Social Security Administration provides more in-depth information, including your estimated benefits at certain ages, to help you determine the right time to claim benefits.
- Consider pensions: Do you or a significant other have a pension? Understand the terms of that pension thoroughly. Generally, you can begin collecting benefits once you reach a designated retirement age. However, many pensions will allow you to begin collecting money early, although usually with smaller payouts. In addition, some pensions will allow you to receive a lump sum rather than monthly benefits. Consider your overall retirement goals and financial situation to determine the best course of action.
- When to take from your traditional IRA or 401(k): Once you’ve figured out your strategy with Social Security and any pensions, you can begin planning a strategy for your defined contribution accounts. With a traditional IRA or 401(k), growth in the account is tax-deferred, although you will be required to pay taxes on the earnings and pre-tax contributions when money is withdrawn. In most cases, if you begin withdrawing from your account before age 59½, you will be required to pay income taxes on the amount you withdraw, plus a 10% penalty (unless you qualify for a penalty exception). Also, once you reach age 70½, you will be required to take minimum required distributions on the money in your account. Consult the IRS website for more information on traditional IRAs and 401(k)s.
- When to take from a Roth IRA or Roth 401(k): Roth IRAs and Roth 401(k)s operate with different rules than traditional IRAs or 401(k)s, which can alter your decision on when to withdraw. Unlike traditional accounts, earnings in Roth accounts grow tax-free, and contributions can be withdrawn tax- and penalty-free at any time. Qualified distributions after a 5-year period are tax-free. So if you’re looking to keep your income tax bill lower, you might consider withdrawing funds from Roth accounts rather than traditional IRAs or 401(k)s. In addition, there are no minimum required distributions during the lifetime of the original owner. Consult the IRS website for more information on Roth IRAs and Roth 401(k)s.
- Consider retirement money from other sources: This could be in the form of inheritance, taxable accounts, health savings accounts, rental property income, or proceeds from the sale of your home (especially if you decide to downsize). It’s important to determine when you are eligible to receive that money, how much you expect to receive from each source, potential tax implications, and other key points of the fine print.
Next Step: Check out our retirement calculator to help you determine a retirement savings plan.
The information and content provided in the Scottrade® Knowledge Center is for informational and/or educational purposes only. The information presented or discussed is not, and should not be considered, a recommendation or an offer of, or solicitation of an offer by, Scottrade or its affiliates to buy, sell or hold any security or other financial product or an endorsement or affirmation of any specific investment strategy. You are fully responsible for your investment decisions. Your choice to engage in a particular investment or investment strategy should be based solely on your own research and evaluation of the risks involved, your financial circumstances, and your investment objectives. Scottrade, Inc. and its affiliates are not offering or providing, and will not offer or provide, any advice, opinion or recommendation of the suitability, value or profitability of any particular investment or investment strategy. There can be no guarantee the strategies discussed in any presentation will be successful.
Scottrade does not provide tax advice and the information contained herein is not meant as a replacement for professional advice. Please consult your tax or legal advisor for questions concerning your personal tax or financial situation.
The content provided is for informational and/or educational purposes only. The information presented or discussed is not, and should not be considered, a recommendation or an offer of, or solicitation of an offer by, Scottrade or its affiliates to buy, sell or hold any security or other financial product, or an endorsement or affirmation of any specific investment strategy. You are fully responsible for your investment decisions. Your choice to engage in a particular investment or investment strategy should be based solely on your own research and evaluation of the risks involved, your financial circumstances, and your investment objectives. Scottrade, Inc. and its affiliates are not offering or providing, and will not offer or provide, any advice, opinion or recommendation of the suitability, value or profitability of any particular investment or investment strategy.
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