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Jul 2 2012 12:00AM

Question

I expect to retire in two years at full retirement age. We will have about $250,000 in IRAs, etc. I would like to consolidate the monies we have so that we can have about 5-7% yearly income from them beginning in two years. This would be income only-leaving the $250,000 intact. Is this possible?

Answer

You are in an important time period in your planning, just before retirement. Following are several factors, among others, that would be helpful in considering how to tap into your IRA funds:

  • Your health and life expectancy
  • Your significant other’s health and life expectancy
  • Your desire to leave an inheritance to anyone beyond you and your significant other’s life-span All other sources of retirement income, including pensions and Social Security (and when you expect to start drawing upon Social Securit. Note that benefits are higher the longer you wait to start Social Security and any cost of living increases would be applied to a higher base, the longer you wait to start. This is an important planning decision to make in concert with all your other retirement income/spending factors)
  • Survivor benefits for all your sources of retirement income
  • Your desired retirement lifestyle and the cash flow that will be needed to fund this lifestyle, including taxes
  • Protection plans to pay for health care and long term care
  • Your risk tolerance

To obtain a 5 percent to 7 percent yield in today’s interest rate environment would require you to take some risk with your funds since there are no guaranteed principle investments paying out this type of guaranteed interest currently. There are a number of vehicles that could be considered to help provide an income flow, including bonds, bond funds, ETF’s, dividend paying stocks or preferred stocks, and Real Estate Investment Trusts. Reducing volatility in a portfolio is important once an income is being drawn from that portfolio to increase the chances of the portfolio lasting a lifetime. In general, if you withdraw 5 percent to 7 percent of a retirement portfolio, and increase your withdrawal each year to keep up with inflation, you increase the chances of the portfolio decreasing to zero. Withdrawing 4 percent to 4.5 percent max from a portfolio increases the odds that a portfolio will not run out of money. You could consider some additional strategies, such as having a near-term use liquid source of income (next 1 to 3 years), an intermediate source to be used within 4 to 7 years and a longer term source, which can be invested more aggressively.

Once you reach age 70 ½, you will be required to withdraw funds from your IRA based on IRS table. These are called your REQUIRED MINIMUM DISTRIBUTIONS and the percentage you must withdraw increases as you get older. Your heirs would also have to take out a certain amount each year from an inherited IRA. Withdrawing some funds from an IRA before age 70 ½ can make sense, especially if those funds are taxed in a relatively low tax bracket.

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