When it’s time to start taking your retirement income, you’ll hopefully have plenty of options to spend, including Social Security benefits, 401(k) and IRA funds, dividends from stock investments, and more. But how to tap into those different sources of income is just as important. Spending assets in the wrong order, taking benefits at the wrong age, or not considering the tax implications can derail your retirement income. To make sure you’re making the most of your nest egg, be sure to avoid these retirement mistakes.
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Mistake #1: Not starting with your investment income
Withdrawing from your investments first gives you more time to grow your retirement accounts through compound interest. If you roll directly into a 401(k) or IRA, you can put years worth of income into retirement savings.
Mutual funds, brokerage accounts, ETFs, stocks or bonds, are all taxable, so you have to pay capital gains tax at the time of withdrawal. Some investments, like some mutual funds, require you to pay taxes on distributions each year. Check with a trusted financial advisor To see if this is the status of your accounts.
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Mistake #2: Claiming Social Security benefits at 62
If you want the maximum Social Security benefits, you need to work until your “full retirement” age.
But benefits at age 62, 66 or 67 are not your maximum benefits. Maximum Social Security retirement benefits begin at age 70. If you’ve made a claim before, you won’t get your full rights.
Every year after full retirement, your payout increases by a certain percentage based on certain criteria. To maximize this strategy, we recommend that you stay until you are 70 years old – the payments will be the highest possible, increasing by 8% every year you wait.
While this strategy can help you collect the maximum Social Security benefits, every situation is different. Consult a financial advisor to determine how and when Social Security benefits should be included in your specific retirement plan.
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Mistake #3: Withdrawing from your 401(k) before RMDs kick in
You can start withdrawing money from your 401(k) when you turn 59 1/2, but that doesn’t mean it’s a good idea. The law doesn’t require you to start taking required minimum distributions until age 72, so that’s when your money can grow with competitive interest.
Mistake #4: Tapping into your Roth before exhausting other options
Stop withdrawing money from your Roth IRA as much as possible.
You pay taxes up front so you can withdraw money from a Roth IRA and it’s not considered taxable income.
Your Roth IRA continues to grow tax-free as you roll into your other accounts. Because a Roth IRA holds after-tax funds and the IRS doesn’t require retaxing, you also don’t need to take required minimum distributions. This account may continue to grow as long as you don’t touch it.
Mistake #5: Not talking to a financial advisor to make the best possible spending plan
Determining the right order to withdraw money from your retirement accounts is different for everyone, so we recommend it Talk to a financial advisor.
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