Ty Bernicke, CFP®, the President and Executive Wealth Manager at Bernicke Wealth Management in Eau Claire, WI, has extensive experience working with retirees to create reliable income streams from their nest eggs. There are various preferences among investors on how to take distributions from retirement accounts, with some opting for monthly income, others for annual lump sum distributions, and some for monthly wire transfers to their bank accounts. This article explores the advantages and drawbacks of these common distribution strategies in retirement planning.
Three popular strategies for taking income from investments in retirement are discussed. The first strategy involves taking a large distribution at the beginning of the year, which is gradually withdrawn over the year. The second strategy entails taking a lump sum distribution at the end of the year for use in the following year. The third strategy is to receive monthly income distributions wired to a preferred bank account. Each strategy has its own benefits and considerations based on individual preferences and financial goals.
A historical back test was conducted by Bernicke Wealth Management to compare the three distribution strategies based on market returns. The analysis assumed a $1,000,000 portfolio with a starting withdrawal rate of 4% indexed to a 3% inflation rate over a 30-year retirement period. The portfolio allocation was 60% stocks (S&P 500) and 40% bonds (aggregate bond index), rebalanced annually. The end-of-the-year withdrawal strategy consistently yielded the highest average ending portfolio balance, followed by monthly withdrawals and beginning-of-the-year withdrawals, showcasing the importance of timing and market trends.
Additional considerations were made regarding the strategic benefits of each distribution strategy. The end-of-the-year strategy was noted for both its wealth accumulation potential and tax planning advantages, given the investor’s ability to assess their tax situation at the end of the year. On the other hand, the monthly strategy provides ongoing budget management, while the beginning-of-the-year strategy offers peace of mind and certainty, especially after favorable market performance.
Ultimately, the best retirement distribution strategy depends on a combination of psychological and financial factors unique to each individual. By understanding the advantages and drawbacks of different strategies, investors can make more informed decisions to meet their retirement income needs. It is essential to consider the impact of fees and charges, investment performance, and personal preferences when determining the optimal strategy for managing retirement income.
