"Out-of-the-Box" Withdrawal Strategies Can Prolong Retirement Income

September 20, 2006 (PLANSPONSOR.com) - The first Insights Report from the new Fidelity Research Institute shows how new withdrawal strategies can increase lifetime income while minimizing tax effects.

In its report, “Beyond Conventional Wisdom: New Strategies for Lifetime Income,” the Institute said Americans may be drawing on social security too early and could benefit from bridging income from other sources to ensure higher social security payments later in life. Using examples, the report shows how retirees could reap thousands more in payments over their lifetime by withdrawing first from other assets and waiting to take their first social security payments.

Other examples in the report show how the order a person chooses to withdraw from different savings accounts affects lifetime income. The report provides a suggested withdrawal hierarchy designed to help retirees maximize lifetime income and minimize tax effects. The hierarchy as outlined in the report is as follows:

  • Take Minimum Required Distributions (MRDs).
  • Liquidate loss positions in taxable accounts.
  • Sell assets in taxable accounts that will generate neither capital gains nor capital losses.
  • Withdraw money from taxable accounts or tax-deferred saving vehicles funded with at least some non-deductible (or after-tax) contributions, such as variable annuities and Traditional IRAs.
  • Withdraw money from tax-deferred accounts funded with deductible (or pre-tax) contributions such as 401(k)s and Traditional IRAs or tax-exempt accounts such as Roth IRAs.

“Understanding when, and to what extent, to tap into each income stream could determine whether a person has substantially more money to live on in retirement or whether they outlive their savings,” said W. Van Harlow, Ph.D., managing director of research for the Fidelity Research Institute, in a press release.

The Institute’s first Insights Report can be viewed from here .