To supplement my income upon retirement at 60, I plan to begin drawing from a 401(k) without disturbing the principal balance. Is it possible to do this? If my principal is $500,000, what can I draw monthly while preserving the principal? What about taxes?
-- Retiring Robert
Because you'll be over age 59½ and separated from service when you retire at age 60, you can draw down as much or as little as you like from your 401(k) account between ages 60 and 70. After age 70½, you must draw down enough to satisfy the required minimum distributions, or RMD, rule.
The concept of a principal balance in a 401(k) account is a little elusive, because it's all principal. Obviously, you're earning some kind of return on this nest egg, but as it's earned, it becomes principal in the account.
Still, it's quite feasible to take
the account balance at retirement and try to preserve
that level as you take distributions. You can
achieve this simply by investing conservatively
and spending frugally. If your investments earn
more than your withdrawal rate plus the inflation
rate, you can increase distributions year over
year by the inflation rate without reducing the
account's principal balance.
The problem comes about when the investment returns don't meet your spending requirements, either because of how you're invested or because you need more income. Inflation is a big consideration in this equation.
Regarding taxes, it's important to remember that 401(k) distributions are taxed as ordinary income. This differs from taxable accounts, in which only the investment returns are taxed and the taxation differs depending on whether the investment returns are capital gains, interest or dividend income.
It's really worth spending the time and money to consult with your professional tax adviser and a financial planner on how best to structure your distributions in retirement. The Bankrate feature, "Financial planners: not just for millionaires anymore" can help you find a planner.