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Advice on amassing sufficient assets and investing them well to build a healthy retirement is easy to find. Books, online resources, lectures, magazine articles, a talk with your financial advisor — even blogs like this — can be invaluable tools for the investor just starting out and those who want to proactively manage their financial futures.
But what about that day, six months after your 70th birthday, when you’re facing the prospect of taking annual required minimum distributions from your IRA or 401(k)? The Internal Revenue Service demands that you withdraw a percentage of your tax-sheltered funds — the amount will vary depending on myriad factors including the type of plan you have, your life expectancy, and the age of your spouse, and other considerations — and pay taxes on those withdrawals.
Guidance at that juncture is somewhat harder to find, but here are some factors we at Coral Gables Trust Company think you may want to consider.
From a tax standpoint, your salary in retirement, hence your tax bracket, will probably be lower than it was during your high-earning years. Your income in retirement will probably comprise interest and dividends from your investments, Social Security, and part-time work if you choose to pursue it.
When you begin drawing money from your IRA or 401(k), the goal is to keep the withdrawals and the tax liability they create from eroding the assets you’ve built up. If the returns from your portfolio can replenish these funds, you won’t have to invade principal.
The standard advice for some years was that your investment choices should become more conservative in retirement. However, it all depends on your tolerance for uncertainty. If you can assume a reasonable amount of risk and be a little more aggressive, there’s a better chance your portfolio will deliver the kinds of returns that will replenish the tax hit.
Most people who are taking distributions at age 70½ will live another 15 years, especially if they are women. That’s about 20 percent of your life. There’s no reason you should run away from equities in retirement or restrict yourself to less-volatile investment vehicles.
We understand there are a lot of factors that will affect your investment decisions in retirement. For example, how is your general health and your chances of meeting or exceeding your life expectancy? How old are your children and where are they in the college cycle?
The interest-rate environment and the state of the general economy at the time you retire also play important roles. Bonds were a great pick in the ‘80s and ‘90s, paying 5, 6, 7, or even 8 percent when interest rates were higher. Now, their returns are not even close, making them not as attractive as equities.
Probably the most important piece of advice for anyone in this phase of life: Avoid any rash moves, which can do more harm than good, but don’t restrict yourself too much. With proper guidance, you can still enjoy returns that will replenish the tax hit and more.
Having trusted wealth advisors, like the professionals at Coral Gables Trust Company, can ensure you avoid the pitfalls that that happen to many retired people, and will greatly contribute to your peace of mind and overall satisfaction with your retirement.