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Retirement Income Strategies for Turbulent Times Joseph E. Kloecker, MBA, CPA

04/06/2020

One of the rewards of a successful long-term retirement plan is withdrawing annually at a “safe withdrawal” rate. The rate is generally a rather low percentage of the plan assets in the early years of a retirement, as the plans are designed to last through retirements of 25 years or more. The ideal, in the early years, is to combine a reasonable investment return with a low percentage draw to allow the portfolio to grow. The same percentage withdrawal rate produces a progressively higher dollar amount as the plan assets grow, which will help to offset inflation. As we get older, the withdrawal percentage can be increased. If you have a prudently-diversified portfolio with the appropriate risk level and withdraw at a safe annual rate, your chances of having your retirement dollars last through your lifetime are strong.

But what about unprecedented times like these?

You look at your portfolio and the decline in value may be surprising, even alarming. As investors, we are confident the market and economy will rebound, we just don’t know when. When downturns are short in duration, we often do not need to do anything. But what if the downturn persists for many months? How should you adjust your retirement plan withdrawals? If you have been withdrawing at the safe rate and now your portfolio has declined significantly, withdraw at the same percentage.

What you will find is that the reduction in your monthly draw is not that significant. For example, if you have been withdrawing $4,000 per month from your IRA, your reduction in spendable income would be $272 per month, assuming a 15 percent tax withholding. With most of us now home-bound, unable to spend money as we normally do, the reduction should be easy to handle. Even if the market rebounds slowly, applying the safe withdrawal rate to your portfolio keeps the probability high that your retirement plan will have sufficient funds to see you through the years.

A provision of the CARES Act, the $2 trillion fiscal stimulus legislation, waives the Required Minimum Distribution (RMD) for retirement accounts for 2020. For many investors, the monthly withdrawal from the IRA is an integral part of retirement income. If you choose to reduce your monthly withdrawal as illustrated, you will not have to worry about withdrawing your 2020 RMD, leaving those funds in your account to grow with a market rebound. Further, if you are taking the RMD because you were required to do so, and you have sufficient other income or after-tax investments to draw from, the CARES Act waiver will save you the taxes that would ordinarily be assessed on your RMDs.

Some investors make charitable contributions directly from their IRA as a way to generate tax savings from charitable contributions while still taking the elevated standard deduction as set by the current tax code. Contributing from an IRA as part of the RMD, in effect, guarantees a deduction that otherwise would be lost by paying contributions via a check drawn on your personal bank account, unless you are itemizing deductions. This strategy should still be considered for 2020 even though there is no concern about taking your full RMD.

Your HBKS wealth advisor along with our tax partners at HBK CPAs & Consultants are ready to help you navigate these uniquely challenging times. Contact us at (814) 459-1116; or email me at jkloecker@hbkswealth.com.

IMPORTANT DISCLOSURES

The information included in this document is for general, informational purposes only. It does not contain any investment advice and does not address any individual facts and circumstances. As such, it cannot be relied on as providing any investment advice. If you would like investment advice regarding your specific facts and circumstances, please contact a qualified financial advisor.

Any investment involves some degree of risk, and different types of investments involve varying degrees of risk, including loss of principal. It should not be assumed that future performance of any specific investment, strategy or allocation (including those recommended by HBKS® Wealth Advisors) will be profitable or equal the corresponding indicated or intended results or performance level(s). Past performance of any security, indices, strategy or allocation may not be indicative of future results.

The historical and current information as to rules, laws, guidelines or benefits contained in this document is a summary of information obtained from or prepared by other sources. It has not been independently verified, but was obtained from sources believed to be reliable. HBKS® Wealth Advisors does not guarantee the accuracy of this information and does not assume liability for any errors in information obtained from or prepared by these other sources.

HBKS® Wealth Advisors is not a legal or accounting firm, and does not render legal, accounting or tax advice. You should contact an attorney or CPA if you wish to receive legal, accounting or tax advice.


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