You’ve been putting aside money for years, hopefully enjoying a decent rate of return, and it’s finally time to start thinking about spending down some of that hard-earned money and maybe upping your monthly budget a bit.
Many investors pay themselves out through what’s known as a systematic withdrawal program, which uses rules to set how much money is withdrawn from an account, instead of just taking withdrawals whenever there’s a need or a want that pops up. A systematic withdrawal plan makes it easier to budget monthly spending. If done well, it can balance income with plans to leave money for a big purchase or maybe bequests to loved ones.
The two big risks in systematic withdrawals are running out of money or having unnecessarily low withdrawals. Insurance companies offer annuities that promise payments for as long as the insured lives – and can even provide payments for the surviving spouse as well. That’s a terrific feature, but it can be costly, even if the costs are hidden through lower payouts.
If you don’t need insurance and want to explore how much money you can take out, here’s what you should consider before setting up that monthly withdrawal from your investment portfolio.
How long do you expect to take withdrawals? The longer the time you want to withdraw, the more money you’ll be taking out. On the other hand, there’s also more time for the portfolio to recover from any market declines.
Do you want to leave money to heirs, and how important is that to you? If you want to leave a set amount of money to your heirs, put it aside. If you only want to leave something, then let that factor in your thinking and keep in mind that inflation and market fluctuations will affect how much money is left at the end.
Do you want to account for inflation? Some systematic withdrawal plans adjust for inflation, others just set a number and stick with it. It’s probably more realistic to expect inflation will require your payments to go up if you want to maintain the same standard of living.
What rate of return do you expect? The nice thing about a long term withdrawal plan is that even as you’re spending some money, the rest of it can continue to work for you. The higher return, the more money you may be able to withdraw, but that brings us to the next point.
How volatile is your portfolio? Portfolios with steady returns might not earn as much as riskier portfolios, but a risky portfolio can suffer a decline that will be hard to recover from, especially when you’re taking money out. That money is no longer available to help the portfolio bounce back when the markets find their footing again.
How about taxes? Uncle Sam wants his cut, too. Are you withdrawing from a Traditional IRA or triggering capital gains? Make sure to consider tax consequences.
If this sounds complicated, you’re right. It is. But the goal isn’t perfection. The goal is to avoid making catastrophic mistakes, and you’re less likely to do that when you at least consider how much you want to leave at the end along with taxes, risk, return, and inflation. If you are looking for a rigorous estimate, that’s what financial planners were born to do.
Evan R. Guido is the Founder of Aksala Wealth Advisors LLC, a 2018 Forbes Next-Gen Advisors List Member, and Financial Professional at Avantax Investment ServicesSM. Evan heads a team of retirement transition strategists for clients who consider themselves the “Millionaire Next Door.” He can be reached at 941-500-5122 or eguido@aksalawealth.com. Read more of his insights at https://finance.heraldtribune.com/category/ask-guido/. Securities offered through Avantax Investment ServicesSM, Member FINRA, SIPC. Investment advisory services offered through Avantax Advisory ServicesSM, Insurance services offered through an Avantax affiliated insurance agency. 6260 Lake Osprey Dr. Lakewood Ranch, FL 34240. The views and opinions presented in this article are those of Evan R. Guido and not of Avantax Wealth ManagementSM or its subsidiaries. Past performance does not guarantee future results. Standard & Poor's is a corporation that rates stocks and corporate and municipal bonds according to risk profiles. The S&P 500 is an index of 500 major, large-cap U.S. corporations. You cannot invest directly in an index. An investment in a money market fund is not insured or guaranteed by the FDIC or any other government agency. Although the Fund seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in the Fund. CDs are FDIC insured and offer a fixed rate of return. They do not necessarily protect against a rising cost of living. The FDIC insurance on CDs applies in case of insolvency of the bank, but does not protect market value. Other investments are not insured and their principal and yield may fluctuate with market conditions. Investments are subject to market risks including the potential loss of principal invested. Retirement plan withdrawals may be subject to taxation and penalties when withdrawn early.