After stashing money away for decades and letting it grow in your investment accounts, retirement means it may be time to finally start making withdrawals. But while it can be exciting to reap the benefits of your hard work, it’s also important to stick to a plan.
You don’t want to take out too much money for your everyday expenses, travel and more and end up outliving your nest egg. Overspending too early can shrink your retirement runway and result in difficult decisions down the road. These are some red flags that you may be withdrawing too much from your retirement accounts.
1. Your withdrawals exceed portfolio growth
The first red flag is if your withdrawal rate exceeds your portfolio’s growth rate. For instance, withdrawing 20% from your portfolio in one year is not advisable since very few portfolios can deliver a return above 20% each year. You might get away with this for one year, but if your withdrawal rate normally exceeds your rate of return, it can create problems in the future.
A general rule of thumb is to stick to a 4% withdrawal rate.
Investing in assets with high growth potential, like stocks, can increase your overall returns, but as your time horizon shrinks, it often makes sense to take some risk off the table. Stocks are generally considered more risky than bonds.
You can also help mitigate concerns around having to withdraw too much by keeping enough cash on hand to cover your living expenses. Financial advisors tend to recommend people have an emergency fund that will cover three to six months of their living expenses, but retirees likely want to boost that to one to two years of living expenses.
Gold Investor Kit Offer: Sign up with American Hartford Gold today and get a free investor kit, plus receive up to $20,000 in free silver on qualifying purchases
2. Your tax bracket creeps higher
Most people enter a lower tax bracket once they retire, even if they collect Social Security and a pension. Without a salary, there isn’t as much income to push you into higher tax rates.
If you end up in a higher tax bracket than you expected, it may be because you’re withdrawing too much money from your nest egg.
Pet Protection: See How Spot Pet Insurance Can Help Your Dog or Cat
3. Your balance is dropping faster than projected
If your balance is dropping faster than expected, that’s another red flag. Consider whether your balance is declining quickly because you’re making excessive withdrawals.
Stock market corrections can also result in portfolios losing value. If volatility in the stock market is causing your balance to swing wildly, it may make sense to lower some of your stock exposure, since you don’t want to be forced to sell assets to cover your expenses when your balance has dropped.
Investors can modify and adjust their portfolios each year to ensure proper allocation across stocks, bonds and other assets. Investing in low-risk assets such as bonds can minimize your downside during market corrections.
Extra Money: Get up to $1,000 in stock when you fund a new active SoFi invest account
Source link
#Signs #Youre #Withdrawing #Retirement #Accounts
