As you approach retirement, you need to think about transitioning from relying on work income to your savings. In addition to the emotional issues that may make you afraid to break into that piggy bank, you will also need to know how to withdraw money in the best way from your 401(k) or other retirement accounts after retiring.
Continuous Growth vs. Inflation
Remember that your retirement savings accounts do not stop growing when you start retirement. You still have the opportunity to increase their value, even when you are withdrawing money from your 401(k) or other accounts after retirement to help pay for your living expenses. However, the growth rate will automatically decline with each withdrawal you make because you have less investment. Balancing the withdrawal rate with the growth rate is part of the investment science for generating income.
The 4% Rule
Many financial advisors recommend the 4% rule when assessing how much you can withdraw from your 401(k) or other retirement accounts without the fear of running out of savings. Using this rule, you withdraw 4% of your retirement savings in the first year, and subsequent withdrawals are based on the inflation rate. The idea is that you should be able to withdraw about 4% annually and maintain financial security for 30 years.
Your Financial Situation
Your unique financial circumstances should also be considered when determining how much you can withdraw from your 401(k) or other accounts after retirement. You may receive a pension, or you have a younger spouse who will continue to work, or you plan to work part-time during retirement. Your and your spouse’s Social Security payments and the monthly expenses you expect based on your lifestyle desires and daily needs are also important matters.
Income on Growth
Bonds, stocks, real estate, and other types of assets pay either fixed or variable income. Increasing your portfolio’s allocation to fixed-income investments as you near retirement is a common strategy. Fixed income can be a safer option, and it can also help transition your portfolio to focus on generating steady and guaranteed income rather than seeking high investment returns.
Laddering Strategy
Many investors looking to slightly increase returns use a laddering strategy with certificates of deposit (CDs) or short- and medium-term bonds. The laddering strategy attempts to combine the liquidity of short-term investments with the higher yields offered by longer-term investments. Instead of buying a single bond for five years paying 3%, you could buy five bonds that mature at different rates over the next five years. Short-term investments will pay less, while longer-term investments will pay more.
First Account
You should also consider which retirement account you will start withdrawing from first. How to do this in the most tax-efficient manner will also depend on your individual situation. You can begin withdrawing money from your 401(k) or IRA without penalty after age 59 and a half, but you do not have to start taking required minimum distributions (RMDs) from tax-deferred retirement accounts until age 72 (70 and a half if you turned 70 and a half before January 1, 2020).
Your Beneficiaries
If you do not live to run out of your money, your funds will pass on to the beneficiaries you named when opening the accounts. It’s good to periodically check your beneficiaries, perhaps after a life change such as marriage, the birth of a child, or divorce, as they may need to pay income tax on these gifts and will have to follow rules regarding withdrawal amounts.
Questions
The Rumor
How to withdraw money from a 401(k) account after retirement? To withdraw funds from a 401(k) account after retirement, you will need to contact the company’s plan administrator. Depending on the company’s rules, you may be able to take your distributions in the form of periodic or non-periodic retirement payments, or in a lump sum. The plan administrator will inform you of the options available to you. Usually, you can deposit the money into an account or have a check sent from the plan.
When can you withdraw from a Roth IRA? You can withdraw the contributions you made to a Roth IRA at any time. If you withdraw the earnings before the age of 59 and a half, they will be subject to income tax and a 10% penalty tax. You can withdraw the earnings without penalty under certain circumstances, including using it to buy your first home and for qualified educational expenses.
Source: https://www.thebalancemoney.com/get-the-money-out-of-your-401-k-or-ira-2894155
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