When it comes time to start drawing your retirement income, you will hopefully have an array of options available to you: Social Security benefits, 401(k) funds and IRAs, dividends from stock investments, and other assets that you can liquidate. But how you tap into these various sources of income is extremely important. Withdrawing assets in the wrong order, receiving benefits at the wrong age, or ignoring tax implications can end up undermining your retirement income. To ensure you get the most out of your nest egg, be sure to avoid these retirement withdrawal mistakes.
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Mistake #1: Not starting with your investment income
Withdrawing your investments first gives your retirement accounts more time to grow through compound interest. If you dive straight into your 401(k) or IRA, you could be costing yourself years of retirement savings income.
Whether you have mutual funds, a brokerage account, ETFs, stocks or bonds, they are all taxable, so you will have to pay capital gains taxes on withdrawals. Some investments also require you to pay tax on distributions each year, such as some mutual funds. Ask a fiduciary financial advisor to see if this is the case for your accounts.
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Mistake #2: Applying for Social Security benefits at age 62
If you want to get the most out of your social security benefits, you will need to work until your “full retirement” age.
But the 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 make a request before, you do not obtain all your rights.
Each year after full retirement, your payout increases by a certain percentage based on specific criteria. To maximize this strategy, we recommend waiting until age 70: payments will be the highest possible, increasing by 8% for each year of waiting.
While this strategy helps you collect the highest Social Security benefits, every situation is different. Consult a financial advisor to determine how and when Social Security benefits should be factored into your unique retirement plan.
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Mistake #3: Withdrawing From Your 401(k) Before RMDs Take Effect
You can start withdrawing money from your 401(k) when you turn 59½, but that doesn’t mean it’s a good idea. The law doesn’t require you to start receiving the required minimum distributions before age 72, so it’s time your money could continue to grow with compound interest.
Mistake #4: Dipping into your Roth before exhausting other options
Postpone withdrawing money from your Roth IRA for as long as possible.
You paid taxes up front so you could withdraw money from your Roth IRA and it will not be considered 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 the required minimum distributions. This account can continue to grow until you touch it.
Mistake #5: Not speaking with a financial advisor to find the best way to plan withdrawals
Determining the optimal sequence for withdrawing money from your retirement accounts is different for everyone, so we recommend speak with a financial advisor.
Voya Financial found that 79% of people who use an advisor say they “know how to pursue their retirement goals”. The study also found that 59% of those who use an advisor have calculated the amount they need in retirement, while 52% have established a formal retirement investment plan.5
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