- When planning your retirement income, personalized advice can be an essential resource to help manage risks and avoid pitfalls.
- The pivot to withdrawals from accumulation is a shift in financial planning strategies and mindset.
- Important elements to address included taxation, withdrawal amounts, income solutions and investment vehicles.
When retirement arrives after years of income and asset accumulation, you’ll pivot to a withdrawal strategy. At that time, there’s a shift in financial planning principles — and in mindset.
Just as a financial advisor helps you accumulate savings, they can also provide personalized advice for your retirement income. Your Ameriprise advisor is committed to helping you manage the complexities of investments in retirement. Following are four key areas where your advisor will work together with you over time and across stock market cycles.
You spend your working years accumulating retirement savings, much of it in tax-deferred accounts such as a 401(k) or IRA. When you retire and begin withdrawing money, the deferred taxes begin coming due. Working with your advisor on a tax-smart withdrawal strategy can help avoid experiencing a higher tax bracket.
A strategy to mitigate “dollar cost ravaging”
While you may have saved a fixed amount every month toward retirement, withdrawing a fixed amount for income every month could put your portfolio at risk. This is may be more pronounced if the market is down during the initial years of retirement.
The reason is, when stock prices are lower because of a market correction, for example, you would need to sell more stocks to reach your income target. Given you are no longer contributing money and have less time for compounding, selling in a down market impacts how long your portfolio assets will last.
Your financial advisor will make recommendations for annual distribution amounts, timing and sources appropriate for your situation.
Income amid record-low interest rates
Your growth-oriented investments likely benefited from many years of low interest rates. Low rates also were good for financing a home or other large purchase.
But in retirement, generating income from interest or dividends from fixed income investments (bonds) requires higher interest rates. Your advisor will provide recommendations for a diversified investment mix that supports your income and growth goals. In the current environment this could include, for example, an income portfolio that invests across three segments:
- High-quality bonds
- High-income bonds
- Dividend paying stocks
Risk tolerance and income vehicles
Your investment portfolio is designed to support your goals and align with you risk tolerance. In retirement, it’s normal to have less appetite for risk and to adjust your portfolio accordingly.
For that reason, your Ameriprise financial advisor will help assess the vehicles for your investments. Again, what worked during accumulation years may be counterproductive in retirement.
A 401(k) account, for example, is good for accumulation. In retirement, however, it may limit your:
- Number of distributions annually
- Ability to specify which assets to sell
- Beneficiary options
- Option for a guaranteed income source
Depending on your situation, there may be benefits to leaving assets in an employer plan (such as a 401(k) account). For example, many large plans have access to low-cost investments, so it’s important to determine whether the benefits of an IRA outweigh any additional cost. Employer plans may also provide:
- Special tax treatment for the in-kind distribution of qualifying employer securities (net unrealized appreciation, or NUA)
- An exception to the 10% premature distribution penalty if you leave your employer in the year you turn 55 or later (IRAs are age 59 ½).
Alternatively, an individual retirement account (IRA) may offer more investment options and flexibility. IRAs may also include broader advice services from your advisor, integration with your financial plan, guaranteed retirement income options and more flexibility for the number of distributions every year.
There are downside considerations for an IRA. For example, loans are not allowed, NUA tax treatment is not available on distributions from IRAs, and your non-spouse beneficiaries can’t convert inherited IRA assets to an inherited Roth IRA account.
A personalized plan for a more comfortable retirement
When you begin using your investments for retirement income, your advisor can help you develop a sustainable withdrawal strategy. Continue to work closely with them.
They will factor in your goals and current conditions, including the stock market, taxes, interest rates and inflation. Their personalized advice will also align with your risk tolerance so that you feel comfortable with your investment selections throughout market cycles.