Retirement and 401k News

Tips for Tapping your Retirement Savings

September 3, 2019 –  The Wall Street Journal

 

I'm approaching retirement, and I'm looking for tools or services that can help me figure out the best way to tap my savings. I know I could hire a financial adviser, but the fees are steep and I hope to do this on my own. Any guidance?

This is a good question for two reasons. First, it highlights why tapping a nest egg is among the most important and difficult tasks we all face in retirement. Second, it allows us to talk about retirement calculators and some of their limitations.

Simply put, your money needs to last as long as you do. Given that, it's essential to pull funds from your savings in the most tax-efficient way possible. Normally, I'm a big admirer of people willing to dive into the finer points of retirement planning. But "optimal withdrawal techniques" can be a bit like cliff diving.

To start, consider the number of accounts and assets you (and a partner) might wish to tap—brokerage accounts, individual retirement accounts, 401(k)s, Roths, variable annuities, pensions, even your house. (There's also the question of when to file for Social Security.) Then consider the various investments you might have within each account: mutual funds, ETFs, individual bonds and stocks. Go ahead: Pick the "best" one to tap first. It gets tricky fast.

Yes, there are tools that can help do-it-yourselfers. (More in a moment.) But I would argue that this is one place where a good adviser is invaluable. And it doesn't have to be a financial planner who is charging you, annually, 1% of assets under management. (If your nest egg is valued at $1.5 million, the fee is $15,000.) Accountants, tax lawyers and so-called robo advisers (automated systems designed to offer financial guidance) all can help, to varying degrees, with questions about drawing down retirement savings.

As for tools…the biggest problem with many retirement calculators is the assumptions they make. Mike Piper, who writes the Oblivious Investor blog, offers the following example: A calculator asks you to enter an expected rate of return for your portfolio. Sounds simple enough. At that point, though, the calculator might assume your nest egg will earn that same return each and every year. Of course, "in real life, returns vary from year to year," Mr. Piper notes.

His advice: "Don't trust a retirement calculator unless you can see all of its assumptions and you judge them to be reasonable."

So, with these caveats in mind, and to return to your original question, here are several tools and services (most for a fee) that can help the DIY crowd with retirement drawdowns:

  • Income Strategy (incomestrategy.com). Lead researcher William Reichenstein is a Baylor University finance professor who has written extensively about how best to tap nest eggs.

  • ESPlanner and MaxiFi (economicsecurityplanning.com). Developed by Laurence Kotlikoff, an economics professor at Boston University. (The former is designed primarily for Windows; the latter works with all platforms.)

  • Pralana Retirement Calculator (pralanaretirementcalculator.com). Complex but comprehensive. Works in Excel.

  • Optimal Retirement Planner (i-orp.com). Computes a "tax-efficient withdrawal schedule" from savings to "maximize retirement income." Includes links to other calculators and retirement resources. And it's free.

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If I don't like Medicare Advantage, can I go back and enroll in traditional Medicare? I seem to remember reading that once you enrolled in Medicare Advantage you lost the right to change your mind.

You haven't lost that right. You can change your mind—and, in fact, you can do so right now.

Each year, there is an Open Enrollment Period (that's the formal name) for all Medicare beneficiaries. This generally runs from Oct. 15 to Dec. 7. During this period, a person who is enrolled in a Medicare Advantage plan can switch to original (or "traditional") Medicare. And vice versa.

Interestingly, there is also something called a "Medicare Advantage Open Enrollment Period." This runs from Jan. 1 to March 31. During this time, a person can "disenroll" from a Medicare Advantage plan and return to original Medicare—and if need be, join a Medicare prescription-drug plan. But this particular enrollment period is a one-way street: You can't switch from original Medicare to Medicare Advantage during this time.

You can learn more at Medicare.gov. At the top of the page, highlight "Sign Up/Change Plans" and then click on "When can I join a health or drug plan?"

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I plan to retire at age 62, but I want to wait until 66 (or perhaps later) to file for Social Security. How will that gap affect my benefit?

If you stop working before your "full retirement age," as defined by the Social Security Administration, your benefit could be smaller than you anticipate.

Your Social Security payout is tied to your 35 years of highest earnings (with early-year figures adjusted for the average increase in wages over time). Typically, your earnings in your 50s and 60s are at their peak and will displace lower inflation-adjusted earnings (from, say, your 20s) when the Social Security Administration calculates your benefit.

But if you stop working at age 62, you could be stuck with some of those low-earning years in your benefit calculation. Or, if you don't have 35 years of earnings, Social Security will use a zero for each year without earnings.

If you're considering retiring early, the Social Security website features several calculators that—depending on how much time you have and how much data you're willing to enter—can give you a good estimate of your eventual benefit. Go to: ssa.gov/planners/calculators/.

Mr. Ruffenach is a former reporter and editor for The Wall Street Journal. His column examines financial issues for those thinking about, planning and living their retirement. Send questions and comments to askencore@wsj.com.

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