Major Retirement Mistake: Not Having a Withdrawal Plan for Your Assets

 

NEW YORK (TheStreet) — Over the past three years, financial planner Kyle Winkfield has seen a 50% increase in the number of clients approaching retirement who want a formal withdrawal plan for their retirement money.

"The conversation typically starts with them wanting to know if they will be OK in retirement and have enough money to keep them in the lifestyle they want,” said Winkfield who is president of The Winkfield Group in Rockville, Md.

Winkfield's observation is no surprise given that 63% of newly retired 66-year-olds have no plan for how much to withdraw from their IRAs or 401(k) plans, according to new research from T.Rowe Price. 

“They are not taking out much money because it’s early in their retirement,” said Anne Coveney, senior manager of Thought Leadership, the research arm of T. Rowe Price (TROW) that uncovers investor trends and behaviors. “As they get further along, their situations might change in terms of health care, so they do need a withdrawal plan because they will need that money.”

The T. Rowe Price study of people who have been retired one and five years found that 63% withdraw from investment funds on an as-needed basis and live mainly on Social Security or a pension.

“We’re seeing the first generation of retirees who have some accounts beyond just a pension,” Coveney said. “They may have pensions as well as 401(k) plans, but the pensions are not as much of a source of income as in previous generations."

Of the 51% of newly retired 67-year-olds who have a formal withdrawal plan, 36% withdrew no money in the last 12 months, 11% are withdrawing 1% this year, 9% are withdrawing 2% and 7% are equally withdrawing 3% and 4%.

"So many have a plan but it is to start scheduled withdrawals at a later date in retirement," Coveney told TheStreet. "Overall, the delayed rate of withdrawals is a positive sign."

When financial adviser Bob Gavlak draws up formal withdrawal plans for clients, he includes a strategy for turning on different income sources, a detailed financial breakdown of the first five years of retirement, overall budget recommendations and a first-year withdrawal rate.

"This is important because one threat to a successful withdrawal plan is a major downturn in the stock market at the start of retirement, and if we know the first year withdrawal rate we can better understand how much exposure the client has to a downturn," said Gavlak, a certified financial planner with Strategic Wealth Partners in Columbus, Ohio.

Withdrawing money for living expenses from an investment fund that is losing value early in retirement can cause a severe shortfall later on.

Gavlak recommends utilizing guaranteed income strategies where possible through pensions and/or annuities to protect from market volatility.

"Invest in income-producing securities to help add value even in price-reduction markets and annually adjust your withdrawal plan to reflect changing economic and personal financial environments," Gavlak said.

Although T. Rowe Price reports that those who are making withdrawals withdraw on average 5%, the 4% withdrawal rate is still a common rule of thumb when it comes to planning.

You need to take into consideration the fact that other things are going to come up like the hot water heater needs to be replaced, a new car or a last minute vacation and these unexpected expenses can spike your withdrawal rate to 5, 6 or even 7% in any given year," said Gavlak.

This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.

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