Being aware of these four withdrawal mistakes when prepping for retirement can help you find peace of mind and avoid years of stress; however, determining the optimal sequence to withdraw money from your retirement accounts is different for everyone, so speaking with a financial advisor is recommended.
Not Starting With Your Investment Income
Withdrawing from your investments first gives your retirement accounts more time to compound interest. If you dive straight into your 401(k) or IRA, you could cost yourself years’ worth of income in retirement savings.
Whether you have mutual funds, a brokerage account, ETFs, stocks or bonds, they’re all taxable, so you’ll have to pay capital gains taxes on withdrawals. Some investments also require you to pay taxes on distributions each year, like some mutual funds. Check with a fiduciary financial advisor to see if this is the case for your accounts.
Claiming Social Security Benefits at 62
If you want your maximum Social Security benefits, you’ll need to work until your “full retirement” age.
But benefits at age 62, 66 or 67 are not your maximum benefits. The maximum Social Security retirement benefit kicks in at age 70. If you claim before, you’re not getting your full entitlement.
Each year after full retirement, your payout increases by a certain percentage based on specific criteria. To maximize on this strategy, try holding off until you are 70 — payments will be the highest possible, increasing by 8% each year you wait.
While this strategy will help you collect the highest Social Security benefit, every situation is different. Consult a financial advisor to figure out how and when Social Security benefits should factor into your unique retirement plan.
Withdrawing From Your 401(k) and IRA Before RMDs Kick In
You can start withdrawing money from your 401(k) when you turn 59 1/2, but that doesn’t mean it’s a good idea. The law doesn’t require you to start taking Required Minimum Distributions until you turn 72, so this is time your money can keep growing with compound interest.
Tapping into Your Roth Before Exhausting Other Options
Put off withdrawing money from your Roth IRA for as long as possible. You paid taxes up front so you can take money out of your Roth IRA and it won’t count as taxable income.
Your Roth IRA will also continue to grow tax-free as you tap into your other accounts. Since a Roth IRA holds after-tax funds and the IRS doesn’t need to tax it again, you also don’t need to take Required Minimum Distributions. This account can keep growing for as long as you don’t touch it.
Planning Withdrawals With a Financial Advisor
If you are concerned about the most efficient way to withdraw from your retirement accounts, consider enlisting the help of a financial advisor. 71% of U.S. adults admit their financial planning needs improvement, according to a 2020 Northwestern Mutual study, but only 29% of Americans work with one.
Consider the benefits: Voya Financial found that 79% of people who use a financial advisor said they “know how to pursue achieving their retirement goals,” while 59% of those who use an advisor have calculated how much they need to retire and 52% established a formal retirement investment plan.
The value of working with an advisor varies by person and advisors are legally prohibited from promising returns, but recent research published in the Journal of Retirement suggests people who work with a financial advisor feel more at ease about their finances and could end up with about 15% more money to spend in retirement.
Finding a Financial Advisor
Chances are, there are several highly qualified financial advisors in your town. However, it can seem daunting to choose one. SmartAsset’s no-cost tool helps make it easy to find the right financial advisor for you, using a short questionnaire to match you with up to three local licensed fiduciary investment advisors in just a few minutes.
All advisors are vetted and verified through a rigorous screening process. SmartAsset confirms each advisor is registered with the U.S. Securities and Exchange Commission or the appropriate state regulator, possesses the proper licenses and has no pending or valid regulatory disclosures within the past 10 years.
Originally published by SmartAsset.