How to Spend Your Savings During Retirement
One of the best ways to make sure you have enough money to last you through retirement is to be savvy about how you spend your savings. Everyone’s situation is different, so there is no single formula that will apply to everyone, but it can be helpful to have some general guidelines on how to spend your savings during retirement.
Sometimes You Have to Spend Money
When you are facing 20 or 30 years or more ahead of you and the uncertainty of medical expenses and other financial crises during that time, it can be tempting never to want to spend a cent. For the vast majority of people, however, it is necessary to spend money to pay ordinary living expenses. Therefore, when you do have to put a crowbar to your wallet, there are ways to do so and minimize the pain.
Keep Your Investments Balanced
If you have created an investment portfolio with a particular balance of stocks and bonds, for example, half of your investments are stocks and half are bonds, try to maintain these proportions, when you withdraw assets to sell. Let’s say you want to pull $20, 000 out of your brokerage account. Rather than removing the entire $20, 000 out of stocks, consider selling equal dollar value amounts of stocks and bonds, so you do not have a lopsided portfolio after the transaction.
Experts also suggest that you should rebalance, if gains or losses from the market change the ratios to either your stocks or bonds by five percent or more. In other words, if you had 50 percent stocks and 50 percent bonds, and a strong market took your stock value up to 55 percent, leaving your bonds at 45 percent, you should consider selling some of the overweight investments to restore the 50-50 balance.
Pulling Money Out of Your 401(k) or IRA
Your withdrawals from these tax-deferred accounts will be taxed as ordinary income, since you did not have to pay taxes on them when they went into your accounts. As a result, the tax issues on tax-deferred mutual funds comprised of stocks, bonds, or cash balances are a simple matter. Since the amount you withdraw will get the same tax treatment, you can distribute the withdrawals among the different type of investments in your tax-deferred account in a manner that preserves your desired proportions of investments.
How to Handle Withdrawals of Taxable Accounts
Let’s say you have a brokerage account that is not tax-deferred. It is not a 401(k) or an IRA. You have stocks, bonds or mutual funds in this taxable account. If you need to withdraw money, first take out the income the account earned, such as interest, dividends, realized capital gains and mutual fund distributions.
This strategy allows you to maintain as much of the principal as possible. If you do need to sell off some of the investments in your taxable account, consider selling investments that you do not expect to do well down the road.
Always Have a Cash Cushion
You do not want to be in a position in which you have to sell off investments in a down market cycle, getting far less than these investments are usually worth. To avoid this distressing situation, make sure you maintain a savings account with a year or two of living expenses. Keep the savings account outside of the stock market. This cash cushion will allow you to skip or reduce your annual withdrawal from your investment accounts, when the market is doing poorly.
References:
AARP. “How to Tap into Your Retirement Savings.” (accessed March 7, 2019) https://www.aarp.org/retirement/retirement-savings/info-2018/tap-into-savings.html
