National Business

With retirement savings, it's use it or lose it

Many people pondering retirement may actually have more wealth than they realize, but the trick is tapping it without blowing it.

New York City's Mayor Michael Bloomberg is fond of saying that smart financial planning is making sure the check to the undertaker bounces. While the odds of hizzoner bouncing a check are long, his point is that we all want our assets to last precisely as long as we do. Spend too much, and you're in trouble; don't spend enough and you might cheat yourself.

"Most people are incredibly conservative when it comes to spending down their assets," said John Ameriks, a principal in the investment counseling and research group at Vanguard, the big mutual fund company.

Assuming you have savings beyond Social Security and a pension, you need to figure out how to draw down on it.

One way can provide comfort, but at the potential price of peace of mind.

The second likely assures long-term security, but could leave you temporarily wanting.

The first technique, dollar-adjusted withdrawal, allows you to keep pace with inflation, but the downside is that you could run out of money. Each year, you increase the dollar amount of your withdrawal by the previous year's national inflation rate. Assuming your holdings are 50 percent stocks and 50 percent bonds, and that you begin by taking out 3 percent to 4 percent of assets, you have at least a 75 percent chance of your money lasting 30 years if you use this formula.

If you want greater certainty that you won't outlive your assets, the second approach, withdrawing a fixed percentage, might be for you. If you take out 4 percent to 5 percent annually, growth in your portfolio should allow for a lifetime of withdrawals. Unfortunately, because of market fluctuations, in some years you will have to make do with less money.

In choosing which accounts to tap first, the idea is to delay paying taxes as long as possible. That gives your money more time to compound. If you're under age 70 1/2, that means you should spend money from any taxable accounts first. That may sound counterintuitive, but remember that you've already paid taxes on capital gains from mutual funds that aren't in your retirement accounts. Meanwhile, IRAs are tax deferred and Roth IRAs are tax-free. It's best to let these continue to compound while you spend down the money in the taxable accounts.

If you are 70 1/2 or older, you are mandated by law to take minimum distributions from IRAs. In fact, you'll face penalties if you don't take the required minimum distributions. Only after you've taken these and exhausted taxable accounts should you dip into employer-sponsored retirement plans or take more from IRAs. Last to be liquidated should be Roth accounts, which under current tax law continue to grow and may even be passed, free of income tax, to your heirs.