You’ve spent your entire life accumulating assets in preparation for a risk-free retirement. You’ve solicited advice from financial advisors, friends, and family.
Now that you’re retired, though, how do you utilize those assets effectively to maintain sufficient income to support your lifestyle?
What Should You Consider When Selling Assets?
When utilizing your assets, keep certain considerations in mind.
- Income taxes
- Estate taxes
- Withdrawal strategies
No matter what your assets, you should consider tactics that involve the lowest possible income tax payment. A good rule is to use most of your taxable account retirement savings first, followed by tax-free municipal bonds or municipal bond funds, before moving on to tax-deferred funds, such as IRAs, 401(k)s and annuities.
Capital gain tax rates are lower than income tax rates for taxable retirement savings (those held outside tax-deferred retirement account). Long-term capital gains for assets you’ve owned for more than a year are less than those for short-term capital gains rates.
Sell any long-term capital gains assets first for retirement income to pay less tax now and allow other retirement savings to grow.
If you have a traditional IRA or a 401(k) account, investment performance is the deciding factor in which you draw down first. The older you are when starting payouts from an annuity, the greater your total payout.
A Roth IRA is free from income tax, so it’s wise to save withdrawals from it for last. Required minimum distributions from tax-deferred accounts must begin at age 70 ½ and are usually taxed as ordinary income. The longer you wait to withdraw from tax-deferred accounts, the more tax-deferred growth they experience.
If you have taxable income you hope to pass on as an inheritance to someone other than a spouse, you may want to tap traditional IRAs, 401(k)s, annuities, and then Roth IRAs last.
Your beneficiary, other than a spouse, can sell an inherited asset and pay little or no income tax, but retirement accounts don’t receive any special treatment. Spouses, of course, can pass property without ever needing to pay estate tax.
If much of your wealth would be taken by taxes, consider leaving much or all of your retirement assets to charity by making your spouse the primary beneficiary and the charity a secondary beneficiary.
Retirement Withdrawal Strategies
One study found 4 withdrawal strategies enjoyed a success rate of greater than 85%. The success rate was based on how many historical retirement periods ended with a portfolio balance greater than zero, and the median ending portfolio value (in future dollars).
The comparison started with a $1 million portfolio, split evenly between S&P 500 stocks and 10-year treasuries. The traditional 4% initial withdrawal rate began with a $40,000 withdrawal the first year, then adjusted for inflation in subsequent years over a 30-year retirement.
The 4 most successful withdrawal strategies are:
- CAPE Median. Based on Robert Shiller’s Cyclically Adjusted Price-to-Earnings ratio (CAPE), which divides the price of the S&P 500 by the last 10 years’ earnings, then adjusts for inflation, this strategy withdraws entirely from stocks if the CAPE is greater than its long-term median. The strategy advocates complete withdrawal from bonds if the CAPE is below the long-term median. This withdrawal strategy resulted in the highest (91.4%) success rate and a median ending portfolio value of $6,771,521.
- Equal Withdrawal Strategy. The simplest strategy of all proved among the most effective with a success rate of 89.7% and a median ending portfolio value of $4,723,103. Divide the total required withdrawal for any given year equally from the current balance of stocks and bonds.
- Rebalancing. The withdrawal is used to bring your asset classes back to the original allocation, in this case, 50/50. For example, if the stocks and treasuries ended up with different ratios (52%/48%), more would be withdrawn from stocks until the balance was 50/50 again. The success rate of this strategy was 87.9%, and the median ending portfolio value was $2,741,748.
- Last-Year Performance, which withdraws entirely from stocks this year if they returned more last year and vice versa. This strategy’s success rate was 86.2%, and the median ending portfolio value was $4,052,572.
Strategies that were not as effective were 7-Year Moving Average (success rate, 81%) and 3-Year Moving Average (success rate, 79.3%).
Just Because You’ve Retired
Even though you’re retired, it’s still important to manage your assets to ensure you have sufficient funds to support you for your entire lifetime. In addition to managing your assets for maximum income, draw up a budget to ensure you don’t overspend.
One choice many seniors make is to retire to a continuing care community, where you never need move again. Find out more about how The Esquiline can help you meet your financial goals while promoting your physical, social, intellectual, and spiritual wellness by calling 618-394-6400 or contacting us online.