You’ve done everything you were supposed to do. You’ve saved, invested, and you have a total of $1,000,000 in your employer retirement plan. You even got the memo about Roth contributions, and $200,000 of your million is in Roth contributions. You’ve decided that now is the time to ride off into the sunset and enter the wonderful world of retirement. What’s next?
The simplest way to make a seamless retirement transition is to replicate how you get paid while you were working.
The first step usually includes rolling over your 401(k) (or another workplace plan) into an individual retirement account (IRA). Most 401(k) providers don’t allow periodic distributions. If you have Roth dollars a separate Roth IRA must be established.
Decide how much you are going to take out and from where. A generally acceptable withdrawal rate is 4% of your balance. That would be $40,000/year or $3,333/month. A good strategy would be to split that monthly amount proportionately to the balances (i.e. 80% or $2,666 from your IRA and 20% or $667 from your ROTH IRA).
Calculate you tax liability. Assuming a Social Security benefit of $1,750/month and taxable IRA withdrawals of $2,666/month (ROTH IRA withdrawals will not be taxable) your Federal tax liability would be around $3,300. To make things simple have that amount withheld from your monthly IRA withdrawals ($275/month). Don’t forget about state taxes. In our example figure on another $80/month withheld bringing your net (after withholding) IRA monthly distribution to $2,311. Your ROTH IRA monthly distribution would be $667. Note that not all of your Social Security is subject to Federal Tax and Wisconsin does not tax Social Security benefits. These factors should be considered, and best practice is to consult with your tax advisor.
Decide when your monthly withdrawals will be deposited to your bank account. Most IRA custodians will allow you to select the date. You should figure out when your Social Security benefit will be deposited. This is determined by the day of the month of your birth year. If you were born between the first and tenth of the month your benefit will be paid on the first Wednesday of the month. If that is the case, then maybe consider having your IRA withdrawals come out around the 15th to simulate getting paid twice a month or every two weeks.
Enjoy. You deserve it.
To continue the conversation, please feel free to send me an email or give me a call (608.849.2706).