Spending Your Nest Egg Might Be Trickier Than You Think

thebalancemoney.com:

Corrects the last paragraph to clarify that the investment manager’s advice applies to when your heirs are in a higher income tax bracket than you are. Story was originally published on Sept. 14.

You may have thought saving for and growing your retirement fund was the hard part and, once you’ve retired, all you have to do is sit back and spend it. But that may be easier said than done, according to a JP Morgan Asset Management study.

By law, people have to take a required minimum distribution from retirement accounts each year beginning at age 72, in most cases. You can withdraw money before that, but 80% of account holders do not, JP Morgan found in its study of 31,000 people approaching and entering retirement between 2013 and 2018. 

Of those who were at least age 72, around 84% took only the minimum required amount, known as an RMD. That resulted in people generating more income later in retirement and possibly even leaving a sizable account balance if and when they reached age 100, showing how inefficient it is to tap your nest egg this way.

Retirement planning can be tricky, because no one knows how long you’ll live or whether you’ll need medical or assisted living care—expenses that can add up quickly. Without steady income from work, people tend to continue saving during retirement, just in case. Instead, experts say, they should aim to actively withdraw from their retirement funds based on their spending plans and of course, tax efficiency.

“Once retirement is under way, in order to meet regular consumption needs a more flexible, dynamic approach to withdrawals—one that supports the actual spending behaviors—can be more effective than simply taking RMDs,” JP Morgan said in its report.

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