Optimize Your Retirement Withdrawals


”How much can I safely withdraw?” It’s a question I hear a fair amount. During your working years, you most likely set aside funds in retirement accounts such as IRAs, 401(k)s, or other workplace savings plans, as well as in taxable accounts. Your challenge now is to convert those savings into an ongoing income stream that will provide adequate income throughout your retirement years.

Setting a withdrawal rate

The retirement lifestyle you can afford will depend not only on your assets and investment choices, but also on how quickly you draw down your retirement portfolio. The annual percentage that you take out of your portfolio, whether from returns or both returns and principal, is known as your withdrawal rate. Figuring out an appropriate initial withdrawal rate is a key issue in retirement planning and presents many challenges. Your withdrawal rate is especially important in the early years of your retirement, as it will have a lasting impact on how long your savings will last.

One widely used rule of thumb on withdrawal rates for tax-deferred retirement accounts states that withdrawing slightly more than 4% annually from a balanced portfolio of large-cap equities and bonds would provide inflation-adjusted income for at least 30 years. However, some experts contend that a higher withdrawal rate (closer to 5%) may be possible in the early, active retirement years if later withdrawals grow more slowly than inflation. Others assert that portfolios can last longer by adding asset classes and freezing the withdrawal amount during years of poor performance or low fixed income interest rate environments like we are experiencing currently. By doing so, they argue, "safe" initial withdrawal rates above 5% might be possible. However, there is no standard rule that works for everyone. Your particular withdrawal rate needs to take into account many factors, including, but not limited to, your asset allocation and projected rate of return, annual income targets (accounting for inflation as desired), and investment horizon.

The bottom line is that this decision is a complicated one. A financial professional can help you determine the best course based on your individual circumstances.

Reminder that certain distributions are required

In practice, your choice of which assets to draw first may, to some extent, be directed by tax rules. You cannot keep your money in tax-deferred retirement accounts forever. The law requires you to start taking distributions—called "required minimum distributions" or RMDs—from traditional IRAs by April 1 of the year following the year you turn age 70 1⁄2, whether you need the money or not. For employer plans, RMDs must begin by April 1 of the year following the year you turn 70 1⁄2 or, if later, the year you retire. Roth IRAs are not subject to the lifetime RMD rules (beneficiaries of either type of IRA are required to take RMDs after the IRA owner's death).

If you have more than one IRA, a required distribution is calculated separately for each IRA. However, you may aggregate your RMD amounts for all of your IRAs and withdraw the total from one IRA or a portion from each of your IRAs. You do not have to take a separate RMD from each IRA. (Your traditional IRA trustee or custodian may provide the amount you are required to take out each year, or offer to calculate it for you.) For employer retirement plans, your plan will calculate the RMD and distribute it to you (if you participate in more than one employer plan, your RMD will be determined separately for each plan).

It is important to take RMDs into account when contemplating how you will withdraw money from your savings. Why? If you withdraw less than your RMD, you will pay a penalty tax equal to 50% of the amount you failed to withdraw. The good news: you can always withdraw more than your RMD amount.

Donor Advised Fund (DAF)

By Joseph Padilla, The Orchard Foundation

When determining safe withdrawal amounts and related strategies, charitable giving can play an important role in many estate plans. Philanthropy not only gives you great Kingdom building satisfaction, but it can also give you a current income tax deduction, allow you to avoid capital gains tax in certain situations, and reduce the amount of taxes your estate may owe when you die.

There are many ways to give to charity. You can make gifts during your lifetime or at your death. You can make gifts outright or use a charitable giving instrument that best meets your situation. You can name a charity as a beneficiary in your will or designate a charity as a beneficiary of your retirement plan or life insurance policy. The most popular charitable giving instrument today is a Donor Advised Fund.

A DAF is like having your own private foundation. Once created, you receive an immediate tax deduction for the market value of your donation, and you can recommend grants from your DAF to your preferred charitable ministries at any time and throughout the years. It offers an easier way for you to make financial gifts to your charity over an extended period of time.

DAFs are set up by individuals and are expertly and confidentially administered by a charitable organization, like The Orchard Foundation. The charitable organization is a separate legal entity, but your account is not. It is merely a component of the charitable organization that holds the account, thus relieving donors from the burden of complex regulatory details. Highlights of a DAF:

  • Easy to set up

  • Cost efficient

  • Tax benefits

  • Anonymity (should you wish to remain anonymous)

  • Legacy of family giving

  • Online granting (through The Orchard Foundation)

When developing your estate plan, you can do well by doing good. Leaving money to your favorite charity rewards both you and the ministry of your choice in many ways. It gives you a sense of personal and eternal satisfaction.

For more information, contact the Orchard Foundation toll free at 833-672-4255 or email us at service@orchardalliance.org.

Rob Pease