A better retirement withdrawal strategy — from the tax man

The withdrawl strategy may be the most important decision you will make regarding your retirement. Yet there really is no answer. Unless of course you can predict the future.

English: In the United States, Social Security...
English: In the United States, Social Security benefits compared for younger vs. older workers. According to author Joseph Fried, this graphic uses information from: C. Eugene Steuerle and Adam Carasso, “The USA Today Lifetime Social Security and Medicare Benefits Calculator,” (Urban Institute, October 1, 2004), from: http://www.urban.org/publications/900746.html. Note: The calculator does not include the value or cost of the Social Security disability program. (Photo credit: Wikipedia)

Researchers analyzed a hypothetical married couple of 65-year-old retirees. The husband receives a Social Security benefit of $12,000 annually, while the wife receives $6,000 through a spousal benefit, making their total household income $18,000 per year. Excluding the value of their home, the couple also holds $250,000 in financial assets invested in a mix of stocks and risk-free bonds, with an allocation that changes with age, realized returns and the assumed coefficient of risk aversion.The bonds have an assumed real interest rate of 3%, while stocks are assumed to have a real return of 6.5%.

Tweaking the RMD formula so that withdrawals for the couple begin at 65, the retirees pull a growing percentage of assets each year for their income, starting at a rate of 3.13% and then going as high as 15.87% at 100.

To compare this strategy with others, the paper used a measure called Strategy Equivalent Wealth, which represents the factor by which the dollar value of the couple’s wealth at 65 must be multiplied so they are as well off as a household that follows the optimal strategy. Researchers gave the optimal strategy an SEW of 1, while those that are suboptimal are greater than 1.

This is a very interesting research study. Although every individual is different this might be an excellent withdrawal to maintain an income throughout your lifetime.

Please comment or call to discuss how this affects you and your retirement portfolio.

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