Retirement plan distributions are often a key source of income during retirement. Depending on the type of retirement income plan, the distributions can occur at different ages. With social security replacing typically only 20-40% of pre retirement income, plan distributions are important in maintaining a similar lifestyle. When considering a retirement plan distribution, one should consider key factors such as when to take distributions, the amount of needed retirement income, expected life expectancy, desire to leave assets to the next generation, and taxation.
Often times, taking a retirement plan distribution before normal retirement age can lead to taxation plus a penalty. These plan distributions should be avoided if possible. There are times when retirement plan distributions can take place prior to normal retirement age without a penalty. These include financial hardship and the first time purchase of a home. There are many options when it comes to retirement plan distributions and the need to make retirement income last even long is important due to increased longevity.
The first step in retirement income planning is determining how much of a nest egg you’ll need to retire. Financial planning studies show that a retiree will typically need at least 80% of his previous income to maintain their standard of living. Of course, this figure will change according to one’s lifestyle during retirement. To be safe, you may want to use a target income similar to what you are making now. Research shows that you do not want your withdrawal rate to be over 6%, but 4-5% is even safer. For example, if you want a retirement income of $50,000/year, you need to save around $1,000,000 ($50,000/.05).
At Clay Northam Wealth Management we work with our clients to explain these choices and provide a retirement income plan for our clients. Serving all of Southern California, we have two convenient offices located in the Los Angeles and Orange County. Please do not hesitate to contact our offices to see how we can be of value to you.