Retirement Distribution

Everyone knows that you should save for retirement, but it is often overlooked in how you will be able to access your money. There are many different retirement vehicles that allow you to access your money at different times. Tax-advantaged retirement vehicles often have requirements on when you can access your money and when you must take money out. Knowing your retirement distribution strategy can help you retire with peace of mind about having enough money in retirement to fulfill your needs and wants.

What is it?

Retirement distribution is how you get your money from your retirement and savings accounts when you retire. Being able to access your money in a tax-efficient way when you need it is crucial to a successful retirement. Depending on the savings or retirement account you are using, there can be restrictions on accessing your money or required distributions for your accounts. Having a suitable and updated distribution strategy can help avoid taking money out of accounts when you don’t need to and avoiding unnecessary tax burden.

One of the primary ways to have a great retirement distribution plan is to diversify your retirement accounts. Two broad categories of retirement accounts are stable income and variable income.

Stable Income Accounts- you will generally receive income on a regular schedule in fixed amounts. Social security, fixed income annuities, and pensions are all examples of stable income accounts. Stable income accounts are helpful for they provide guaranteed sources of income. However, because the income is fixed, your money in these accounts isn’t growing anymore.

Variable Income Accounts- you have more control of when you can withdraw your money and how much. Types of variable income accounts are deferred annuities, 401(k)s/IRAs, and investment accounts. Variable income accounts are valuable as they continue to grow your money. A downside to these accounts is because they are invested in the market, you will lose money if you must access your money when the market is performing poorly.

One of the best ways to use the security of stable income accounts and the growth potential of variable income accounts is a floor/ceiling income plan which uses your fixed income to create a floor that covers your essential financial needs and uses your variable income accounts to cover your discretionary expenses.

Why it matters to you.

Retirement distribution is important to you because it can help you pay the least amount of taxes in retirement and make sure that you don’t run out of money. Having a good retirement distribution plan also helps you know what accounts you should be taking money from and what accounts you should be taking money from later to pay the least amount of taxes, avoid any early withdrawal penalties, and to make sure that you remain financially secure even if the market is doing poorly.

Like the phrase “Don’t put all of your eggs in one basket”, a wise retirement distribution strategy diversifies your retirement across multiple different accounts. This helps buffer your retirement from the volatility of the market, allowing you to meet your essential financial needs in retirement regardless of what the market is doing.

Tips to Know:

• If you are retiring before you are 60, be aware your 401(k) and traditional IRA accounts early withdrawal penalties. Except for certain circumstances, there is a 10% tax penalty on withdrawing money from these accounts before you are 59½ years old.
• All employer sponsored retirement plans and traditional IRAs have required mandatory distributions at age 72. This means that you must withdraw money from your account even if you don’t need the money.
• Withdrawing money from your investment accounts can have a large impact on your tax bracket in retirement. Understanding the tax implications of your withdrawals is key to paying the least amount of taxes. Working with an Abri advisor can help you have the confidence that your distribution strategy is as tax smart as possible.

Key Takeaways

Retirement distribution may not be the first thing you think about when you are planning for retirement, but it is crucial in ensuring that you are pulling your money from the right accounts at the best time. Saving your money to reach your retirement goal was the hardest part. Now you want to ensure that you have the right distribution strategy in retirement to help you achieve your financial goals.

If you have any questions on how to best prepare your family for the future, one of our advisers would be happy to help!