10/2019 KIPLINGER’S PERSONAL FINANCE 53years. Anytime it rises 50% above the
starting point—say, a $1 million portfo-
lio grows to $1.5 million—increase the
dollar amount you withdraw that year
by 10%. Then you can resume increas-
ing that dollar amount by the rate of
inf lation until your portfolio grows
significantly again to warrant a raise.
(Of course, if you want to leave a leg-
acy for your heirs, you may want to
keep your money invested.)MANAGE YOUR
PORTFOLIO
Inf lation is relatively low today, but
even at current rates, it can greatly
erode your purchasing power over a
long retirement. And the Consumer
Price Index, the most popular gauge
of inf lation, may be undercounting
your expenses in retirement. The
CPI-E, a government index that
gauges the rise in prices for house-
holds age 62 and older, averaged 1.86%
annually over the past decade, slightly
higher than the general inf lation rate.
That’s because older households de-
vote more of their budget to health
care, and the cost of that has risen
faster than the general inf lation rate.
To keep up with inf lation, your
portfolio will need the kind of long-
term growth that stocks can provide.
The right amount for you depends on
how much risk your nerves can han-
dle, along with your other assets and
sources of income. If you’re near re-
tirement or newly retired, Vanguard’s
Bruno recommends a diversified port-
folio with 40% to 60% in stocks.
Investors may have grown compla-
cent in a bull market that’s now close
to being in its 11th year, but a bear is
inevitable. Given the long run of this
bull market, there is an elevated risk
of a bear on the horizon, says Kitces.
A bear market can be devastating if
it strikes early in retirement and you
are forced to sell investments at a loss
to pay bills. One way to lessen the im-
pact of this, says Kitces, is to reduce
your exposure to stocks as you head
into retirement. If you’re, say, 50% inout what expenses you can cut.
But knowing whether you’re with-
drawing money too quickly from your
nest egg can be tricky: You don’t know
how many years you’ll live in retire-
ment, and you can’t count on earning
the returns that we’ve enjoyed in the
decade-long bull market. “If you do it
in a careful and measured way, you
can make withdrawals and, even if
your account drops in value, not nec-
essarily run out of money,” says Tim
Steffen, director of advanced planning
for Baird in Milwaukee.
One popular guideline has been
the 4% rule, which was designed in
the 1990s as a safe withdrawal rate for
a 30-year retirement that may include
bear markets and periods of high in-
f lation. It assumes half of your retire-
ment portfolio is in stocks and the
other half is in bonds and cash.
The rule works like this: Retirees
draw 4% from their portfolio in the
first year of retirement. Then they ad-
just the dollar amount annually by the
previous year’s rate of inf lation. So
with a $1 million portfolio, your with-
drawal in your first year of retirement
would be $40,000. If inf lation that
year goes up 3%, the next year’s with-
drawal would be $41,200. If inf lation
then drops to 2%, the withdrawal for
the following year would be $42,024.
The 4% rule is a good starting point
but may need some fine-tuning to fit
your own situation, says Maria Bruno,
head of U.S. wealth planning research
at Vanguard. “Are you retiring at a
younger age? If so, you might need a
lower withdrawal rate.” You may also
need to withdraw your money more
slowly if you are investing more con-
servatively, she adds.
Michael Kitces, director of wealth
management at Pinnacle Advisory in
Columbia, Md., says that while the 4%
rule protects portfolios under bad-case
scenarios, retirees could experience the
opposite and end up after 30 years with
more than double what they started
with—even after decades of withdraw-
als. He suggests that if you use the rule,
you review your portfolio every three
KipTipTa x -S m a r t
Strategies
The conventional wisdom to minimize
taxes in retirement is to draw first from
taxable accounts, which are generally
taxed at favorable long-term capital
gains tax rates (as low as zero but no
higher than 23.8%); then tap tax-de-
ferred accounts, such as traditional IRAs
and 401(k)s, whose withdrawals are
taxed as ordinary income; and dip into
Roth IRAs last so this tax-free money
has more time to grow.
But if you’re approaching retirement
with the bulk of your assets in a 401(k)
or traditional IRA, consider a slight break
with convention. The IRS requires you to
begin minimum withdrawals from tax-
deferred accounts after age 70½—so it
can finally start collecting income taxes
on the money. (Legislation pending in
Congress would raise that age to 72.)
But if your balances are large enough,
these mandatory withdrawals could
throw you into a higher tax bracket.
“The crop of retirees that are leaving
the workforce today is the RMD genera-
tion,” says Maria Bruno, head of U.S.
wealth planning research at Vanguard.
“These are folks leaving the workforce
with large tax-deferred balances.”
It’s not too late to reduce future RMDs
if you’re still in your sixties. “We call this
the sweet spot,” says Bruno. One tax
strategy is to draw from tax-deferred
accounts early in retirement, when you
might be in a lower tax bracket, and use
the money to help with living expenses
while delaying Social Security. Or, if you
don’t need the cash to live on, you can
gradually convert some tax-deferred
money into a Roth IRA.
In either case, make sure you don’t
withdraw or convert too much money
in a single year and push yourself into
a higher tax bracket. It’s a good idea to
visit an accountant or financial adviser
to make sure you don’t trigger any un-
intended tax consequences.