You’ve got more than enough cash to cover your living expenses during retirement — plus, perhaps, a little extra to pay for travel, entertainment and potentially higher medical expenses down the road.

Or do you?

Even the most financially flush retirees can deplete their savings in short order if they don’t establish a sustainable withdrawal strategy and stick to it.

Indeed, the secret to making your nest egg last is not how much you’ve got, but how well you manage your cash flow.

“Withdrawal rates are the most important factor because you’ve got a limited supply of assets in retirement,” says Tom Balcom, founder of 1650 Wealth Management in Miami. “You have to be sure you know what to expect, and be ready to adjust your withdrawal rate if the market declines.”

Smart withdrawal strategies

  • Withdraw 4 percent to 6 percent of fund annually.
  • Tap taxable accounts first, Roth IRAs last.
  • Have one to two years’ worth of emergency funds.

How much can you take?

To determine an appropriate withdrawal rate, you’ll need to consider your age, life expectancy, living expenses and rate of return on investments.

If you’re generally healthy, have adequate savings and retire at age 65, most planners say you can safely begin with a 4 percent to 6 percent withdrawal rate during your first year of retirement. After that, build in cost-of-living adjustments each year to account for inflation.

For example, if you’ve got a portfolio worth $500,000, withdraw roughly $25,000 the first year, and add an additional $750 the second year (using the standard 3 percent inflation rate) and so on.

Assuming a 7 percent return on your overall portfolio, that 4 percent to 6 percent withdrawal rate will allow you to draw only from earnings without depleting your principal. If you think the return on your portfolio will be lower than 7 percent, adjust your income amount accordingly.

If you retire early, you will not only require a larger nest egg to cover your living expenses for longer, you may have to reduce your withdrawal rate by 1 to 2 percentage points.

“Inflation is a bigger factor for early retirees because it erodes your assets over time,” says Balcom. “Some people go into retirement thinking they should invest heavily in certificates of deposit or bonds because they get a guaranteed return, but they don’t understand that with taxes and inflation, there’s no real return. You need to continue investing so you don’t run out of money, especially if you plan to spend more than 30 years retired.”

Regardless of age, he adds, all retirees should have a financial safety net in place to cover their living expenses for at least 12 months (ideally two years) and strive for an 8 percent investment return on average.

Avoid penalties/minimize taxes

When converting your savings into income, you’ll also need to consider both tax implications and distribution requirements.

Bob Mecca, financial planner with Robert A. Mecca in Hoffman Estates, Illinois, says it’s generally wise to tap taxable accounts first as a source of income. By using money from taxable mutual funds, individual stocks and other investments, you allow tax-favored assets to enjoy compounded growth as long as possible.

Another benefit of tapping non-retirement investment accounts first is that earnings on these accounts are generally taxed at the lower capital gains rate, rather than the ordinary income tax you’ll owe when you take distributions from your 401(k) and IRA.

Once you’ve spent down your taxable sources of income (including personal savings), says Mecca, move on to tax-deferred accounts, including traditional IRAs and 401(k)s.

Just be sure you’re at least 59 1/2 before you take money from a tax-deferred account. Under most circumstances, you can’t begin tapping your traditional IRA or 401(k) until that age without incurring a 10 percent early withdrawal penalty, although exceptions to this rule do exist.

Also remember that you must begin to take distributions from your traditional IRA by age 70 1/2 to avoid paying a 50 percent excise tax on the amount not distributed. To learn more about creating a wise withdrawal strategy, see the Bankrate article “Know your required minimum distribution.”

Roth IRAs, says Mecca, should be left for last.

Since there are no minimum withdrawal rules for a Roth, your earnings will continue to grow tax-free. A Roth IRA also provides valuable estate planning benefits, since your heirs will not owe taxes on an inherited Roth — and better yet, they will be able to spread out their withdrawals over their lifetimes if they don’t need the money, allowing the account to continue growing tax-free.

When determining a wise withdrawal strategy, consider not just your age and the size of your nest egg, but how to make the most of your money by minimizing your tax bite.

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