Running projections to see if you are adequately funded for retirement can create a gratifying feeling if the calculations work out. Knowing that your lifestyle can be maintained or enhanced feels good. But it still doesn’t tell you exactly what accounts you should be withdrawing from and in what sequence or amount.
With the rather drastic reduction in value that many retirement accounts have suffered over the past couple of years, many people are questioning the withdrawal rate and sequence of withdrawals. By sequence, I mean exactly when you were planning on withdrawing funds from your IRA, 401(k), CD or investment portfolio. For many people, managing their overall portfolio to fund a regular withdrawal can be more work than they bargained for – especially with unplanned volatility and lower interest rates than anticipated. Poor planning for withdrawals can lead to selling investments at their low points of value.
One strategy to mitigate the uncertainty of “what to pull out when” is to fund your basic living expenses with investments that have very little or no volatility. Two common choices for this are CDs or fixed annuities. If you need $5,000 per month from your nest egg, and can’t stand the thought of selling investments that are down, fund that monthly income need with a CD or fixed annuity. If you decide that you need seven years of safety money to live on at any given time in order to feel comfortable, then you should consider saving that seven years of $5,000-per-month withdrawals, or $420,000, and invest defensively for a dependable source for your monthly cash flow needs. Of course, “guaranteed” investments are no free ride either. They have fees, charges, expenses, commissions, early withdrawal penalties, limitations to guarantees, and a whole lot more.
The balance of your nest egg can get invested for a longer term horizon, and be subjected to some volatility.
This method of investing retirement assets does not eradicate volatility and risk from your retirement portfolio, but it does add comfort knowing that your volatile investments are not needed for this year’s electric bill. The theory is to give your volatile investments a chance to go through the normal or expected up and down cycles, and not be forced into a sale during a low period.
Hi James. There will be no official notice from the IRS. They deem simply changing the law and having it hit the news as sufficient notice. Talk to your IRA custodian or your financial planner about the mechanics of suspending this year’s distribution.
John
Posted by: John P. Napolitano | September 15, 2009 at 02:51 PM
John,
I read your article "Making Sense", in The Patriot Ledger, Sunday, Sept. 13, 2009.
I have an IRA, and am over 71 1/2, and have to deduct money every year from it. Your article stated that a one time exception was placed into law this year, allowing retirement acct. holders the ability to ignore the required minimum distribution rules.
Is this a Federal or a State law? Are all IRA people going to be officially notified of this?
Posted by: James Knapp | September 14, 2009 at 09:21 AM