The retirement draw down: which funds to tap into first?
Q: My wife and I plan to take out about 6 percent of our portfolio a year to pay for some extras. We have guaranteed pensions. I'm trying to decide if we should draw money from our funds that pay dividends, those that don't, or some combination of both.
T.J., via e-mail
A: Many retired investors struggle with how much and which investments to draw money from to support their lifestyle, says Pat Antonetti, a senior vice president at the Naples, Fla., office of Fort Pitt Capital Group. Several factors go into deciding how much they should take out of their accounts, including their distribution timeline, asset allocation, and risk tolerance.
But first off, Mr. Antonetti says in order to pull 6 percent out of your account and maintain a relatively stable value, you'll need an annual return of about 9 percent, taking into account inflation and taxes.
Having said that, Antonetti adds that he advises clients to draw money from a combination of sources.
In your situation, he probably would advise you to first take distributions from dividends and interest. If there is a shortfall, he would then recommend taking distributions from capital gains.
In most cases, it makes sense to draw money from taxable accounts instead of tax-deferred accounts, such as IRAs. The premise here is that investors should take advantage of the tax-deferral offered for as long as possible before taking distributions.
A total return strategy will allow you to keep more of your funds in a growth strategy, Antonetti says.
Over time, this approach may produce a higher rate of return and provide for a retirement lifestyle of your choice.