Have you considered the order you’ll withdraw from your retirement income when the time comes?
Withdrawing funds in the wrong order might cost you hundreds of thousands of dollars.
A Northwestern Mutual study found that an overwhelming majority of U.S. adults, 71 % to be exact, admit that their financial planning needs improvement.
However, only 29% of Americans currently work with a financial advisor.
Although the value of working with a financial advisor varies by individual and situation, research shows that people who work with a financial advisor feel more at ease about finances and could end up with 15% more money to spend during retirement.
A recent study conducted by Vanguard found that a $500,000 investment would grow to over $3.4 million over 25 years with the guidance of a financial advisor, on average.
In contrast, the expected value from self-management would be $1.69 million, about half as much.
In simple terms, an advisor-managed portfolio would average 8% annual growth over a 25-year period, in comparison to 5% from a self-managed portfolio.
Planning the optimal sequence to withdraw money from your retirement accounts is different for each individual, so consulting a financial advisor is critical.
There is a high likelihood that there are numerous highly qualified financial advisors in your area. Do your research and ask around for recommendations when choosing the right one for you.
Here are five common mistakes when withdrawing retirement income can help investors avoid years of stress and find peace of mind.
Not beginning with your taxable investment income
Withdrawing from your taxable investments first gives your retirement accounts more time to build and compound interest.
If you jump headfirst into your retirement accounts instead, such as your IRA or 401(k), that could cost years of potential retirement income.
Whether you have a brokerage account, stocks, bonds, ETFs or mutual funds, they are all taxable, so you will have to pay capital gains taxes on withdrawals.
Additionally, some investments require you to pay taxes on the distributions you take each year, like with some mutual funds.
Check with a financial advisor to see what the penalties and taxes are due on your accounts.
Withdrawing from your IRA or 401(k) before RMDs start
While you can begin withdrawing money from your 401(k) when you reach age 59 ½, it doesn’t mean that it’s a good idea.
The law doesn’t require you to begin taking required minimum distributions until you turn 72, it is during those years that your money can continue growing with compound interest.
While this strategy can help you collect the highest Social Security benefit, each situation is different.
Investors should consult a financial advisor to determine when and how Social Security benefits should factor into your retirement plan.
Tapping into your Roth IRA too soon
Retirees and future retirees should put off withdrawing from your Roth IRA for as possible. Your Roth will continue to grow tax-free since you paid taxes up front and it won’t count as taxable income while you tap into your other accounts.
Because a Roth IRA holds after-tax funds, the IRS doesn’t need to tax it again. You also don’t need to take required minimum distributions. Your account can continue growing as long as you don’t touch it.
Claiming your Social Security Benefits at age 62
If you want to receive your maximum Social Security benefits, you will need to work until your “full retirement” age.
The maximum Social Security retirement benefit doesn’t kick in until age 70. Benefits at 62, 66 or 67 are not your maximum benefits, and if you claim before, you are not getting your full entitlement.
For each year after full retirement, your payout will increase by a certain percentage, based upon specific criteria. To maximize this strategy, you should try to hold off until age 70, when payments will be at the highest possible. This amount increases by 8% each year you wait.