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How much should I be drawing off my investments during Retirement?

by | Sep 12, 2017 | The Ship's Wheel


You have finally made it to retirement.  You saved your money and now it’s time to take withdrawals to provide an income stream to you during your retirement years.  The question is “how much can I take without depleting my funds before I die?â€Â  This is a dilemma facing many retirees today.  There have been numerous studies done on this subject.

The most recent that I have seen was done by Trinity University and is called “The Trinity Studyâ€.  The underlying premise is that if certain withdrawal rates could provide lifetime income based on historical market data and returns then the withdrawal rate will also be sustainable in the future.  I have reviewed this study and while it makes many great points, no study is foolproof when it comes to investing.  Everyone has a different situation and each portfolio should be tailored to meet the specific needs of each client.  “The Trinity Study†runs scenarios based on asset allocation between stock, bonds, and cash during retirement taking withdrawals at percentage rates ranging from 3 to 12 percent.  One thing is certain there is no absolute correct answer.

In my experience, over the last 21 years of helping people reach their retirement goals and then guiding them during the retirement years, flexibility is the key.  The market changes constantly and as investors we need to be willing to adapt to these changes.  The time of investing in bonds yielding 6% tax free is over for now.  Don’t make the mistake of retiring and thinking you can put all your money in bonds and everything will be fine.  One of the key indicators on how we invest is interest rates.  We are sitting at historical lows and the Fed has begun to tighten monetary policy.  Over time this will begin to erode the value of your bond portfolio.  Creating a balance between equities, fixed income, and cash is the key to having the income stream you need to live along with the capital preservation you need to sustain throughout your retirement years.  A portfolio that is too overweight equities will expose you to too much market risk, while being overweight bonds could fail to grow enough to keep up with inflation and you will eventually run out of money.

For a portfolio to be successful during retirement, the proper allocation is the most crucial factor.  Most professionals will tell you that withdrawal rate between 4-6% of the portfolio value are where you need to be throughout your retirement years to minimize the risk of running out of money.  I am here to tell you there is no magic number and your portfolio as well as your withdrawal rate needs to be adjusted throughout retirement.  Markets are constantly changing and with that change brings the need to adjust your asset allocation and possibly your withdrawal rate during retirement.  If you would like to learn more about this topic or have your portfolio reviewed please contact Jay Chapman.

Am I eligible to Convert my Traditional IRA to a Roth IRA?

Converting your Traditional IRA to a Roth IRA can be one of the best financial decisions made when saving for retirement if done correctly. Prior to 2010 there was an income limit that restricted the conversion to a Roth IRA if your (AGI) was over $100,000. As of 2013, the income limitation does not exist for a conversion, but it still exists for contributions. This does not mean it will not come back in the future, but for 2013 and beyond anyone can convert an existing Traditional IRA to a Roth IRA regardless of income.

For example, someone has a Traditional IRA with $350,000 invested, that IRA can be converted to a Roth and all the taxes need to be paid for the tax year the conversion was completed. After converting to a Roth, the money grows tax-free. Paying the taxes on this money now might sound like a tough pill to swallow, but the potential tax savings down the road can be significant. Wouldn’t you rather pay taxes on $350,000 now than pay taxes on $1,000,000 in the future? One of the keys to doing this correctly is paying the taxes with funds outside of a qualified plan. Paying the taxes with money from the IRA defeats the purpose and will negate the full tax saving potential.

This is just one example of completing a Roth conversion. You can do partial conversions as well. This means you do not have to convert the entire account. You could develop a strategy of doing partial Roth conversions over multiple years. The key is to consult with your tax advisor or accountant to make sure the conversion will not put you into another tax bracket. Every dollar you convert is taxed at your ordinary income tax rate. This strategy works best for younger investors who have longer to allow the money to grow and compound. It can also work well for an older investor who is in a low tax bracket. Another reason to convert to a Roth is that Roth IRAs are not subject to the Required Minimum Distribution after you reach age 73. For those of you out there that do not plan to use your IRA money to live this can be a huge advantage when it comes to passing along your IRA to your beneficiaries. Roth IRAs continue to grow tax-free after the conversion and after you die. There are distribution requirements for the beneficiaries, but the distributions are tax-free as well.
This strategy might not be right for everyone. I would advise you to consult with a Certified Financial Planner™ or your tax advisor prior to taking advantage of this potentially large tax savings. One of the best times to complete a Roth conversion is when the value of your Traditional IRA has fallen due to a market correction like we experienced in 2022. If you have questions on this article or would like to schedule a free financial review. Please contact Jay Chapman at 772-320-9658 or email [email protected].

Jay Chapman| CFP®

Jay Chapman| CFP®

Founder

Jay Chapman, CFP®, is founder of Chapman Capital Advisors, as a member of the advisory team. He has over 20 years of experience in the Financial Services industry.

Will Thompson | CFA®, CFP®, AIF®

Will Thompson | CFA®, CFP®, AIF®

Advisor

Will provides the in-house expertise of CFP®, CFA®, and AIF® that is uncommon for boutique firms.


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