Weighing Retirement Withdrawal Options
A great deal of the planning for our 23-day Denali climb in 2017 involved food. Bulk, weight, caloric type and content, prep and cook time, cold tolerance, and savor were all important considerations. A frozen chocolate bar will break your teeth. At 17,000 feet, your body struggles to digest beef jerky. A food allergy can end your climb, and your life! Meticulous meal planning was required for such a long excursion in such a threatening environment. Income planning, and more particularly, the withdrawal decisions retirees make from investment accounts, are equally critical, as a lengthier retirement, and, therefore, a bigger cumulative retirement income need, have accompanied a longer life expectancy for many Americans. What are the withdrawal options? What are the advantages and risks of each? How will you know which to choose?
Trail snacks on Denali came every 75 minutes and equated to a decision over protein and sugar. Smart climbers ate their protein on the lower mountain, and their sugar at high altitude. The two general retirement withdrawal options from investment accounts are systematic withdrawals and annuitization payments.
Systematic withdrawals are voluntary distributions taken at regular intervals, and can be increased or decreased, and started or stopped, at any time. Besides flexibility, advantages include low expenses, access to a lump sum, growth potential and the ability to raise the income amount to combat inflation, and control to withdraw what is needed each year. Risks include premature depletion, inequitable distribution of returns due to a major bear market during early withdrawals (understand the Monte Carlo Analysis), and the weight of knowing you may outlive the account.
Annuitization is the formal conversion of an annuity from accumulation to a fixed stream of payments. During accumulation the account is allocated based on investment objective and contributions may be made. During annuitization payments are made in the amount, and for the duration chosen. The two main advantages to annuitized payments are lifetime benefits and the absence of market risk. Disadvantages include higher expenses, loss of access to principle, loss of income flexibility, and loss of purchasing power to inflation.
Other considerations regarding these asymmetrical withdrawal options include differing tax treatment, potential withdrawal penalties, and coinciding with required minimum distributions (RMD’s). In case you still think this exercise is elementary, consider the withdrawal program must also a) accurately meet the annual need, b) minimize your annual tax burden AND be consistent with your long-term tax plan, c) not disrupt your estate plan, and d) represent the wisest overall financial decision for you and your family, all factors considered.
Precious few mountaineers have ever climbed Denali alone; it is for the vast majority a team effort. Whether it is you, or someone else on your behalf, make sure your investment advisor, tax planner, and estate planner are aware of these issues, considerate of both withdrawal options, and that they work together to find the balance of these options that works best together for you.
Think about it, Shaun.
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