March 10, 2008

Once you hit retirement, you get to kick back and enjoy your savings. But you'll enjoy them a lot more and a lot longer if you manage your withdrawals smartly. To give yourself the best chance of outliving your money, financial experts recommend you withdraw no more than 4 percent to 5 percent of your total nest egg every year.

You also want to minimize your tax bite. Generally speaking, the more money you leave tax-deferred in a 401(k) or IRA, the more your nest egg will grow, because a large balance can compound faster without the drag of taxes. But taxes will eventually come due on that money.

The key is to manage your money so that you pay the lowest possible tax rates on your withdrawals. That's why experts suggest in the early years of retirement you draw some of your income from your taxable accounts and some of it from your tax-deferred accounts. To find the right mix for you, read Money 101 Lesson 15, Hiring Professional Help tax adviser.

You might stretch your money even farther if you convert your traditional IRA to a Roth and tap it only after depleting your taxable accounts. Remember, too, if you have a traditional IRA, you must start taking minimum required distributions when you turn 70-1/2. There are no such withdrawal requirements for a Roth.

If you need to make any portfolio adjustments in retirement, do so in your tax-deferred accounts, says Don Boegel, a certified financial planner in Plymouth, Minn. That way, you won't pay any taxes - or, in many instances, transaction costs - to move your money around, as you do when you sell off a taxable investment and buy another.

Your taxable account, in turn, is the best place to harvest tax losses. In this process, you sell an investment on which you've lost money and apply that loss against future capital gains, in effect reducing your tax bill.

If you find your nest egg isn't quite large enough when you retire, there are still things you can do to stretch the assets you have accumulated. For instance, you might:

• Take a job in retirement. Imagine taking a part-time job that reduces your withdrawals from an IRA by $15,000 a year for 10 years. By letting that money grow tax-deferred longer, after 10 years you would have almost $220,000 that you otherwise wouldn't have had, assuming you earn an 8 percent annual return.
• Get money from your home. If you are age 62 or older, you can convert your home equity into tax-free retirement income by taking a reverse mortgage.
• Move to a less expensive area. Doing so could stretch your retirement income by 15 percent or more.