When Can You Start Tapping Into Retirement Income?

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When you retire, it would be convenient if all your expenses were to "retire" as well. But they won't.

In fact, you'll likely need between 80 percent and 100 percent of your pre-retirement income to maintain your standard of living in retirement. And you may need even more, depending on what you plan to do during your retirement years.

So, well before you retire, ask yourself a couple of key questions: Where will the money come from? And when can I access it?

Let's take a look at some of your likely retirement income "pools," along with the rules governing withdrawals from these sources.

  • 401(k) plan -- If you have a 401(k) plan at work, take full advantage of it. Your earnings have the potential to grow on a tax-deferred basis and you typically contribute pretax dollars, so the more you put in, the lower your adjusted annual taxable income.

Generally, you have to be at least age 59-1/2 to withdraw money from your 401(k) without incurring a penalty of 10 percent of the taxable amount of your withdrawal. However, you can avoid this penalty under the following circumstances:

  • You leave your employer when you are at least 55 or you become disabled.
  • You take a series of equal periodic payments, made at least annually, for your life or life expectancy.
  • You "roll" your 401(k) withdrawals into an IRA.

Of course, you may not want, or need, to tap into your 401(k) at either age 55 or 59-1/2.

If that's the case, you can leave your account alone with the potential to continue growing. But you will have to start taking withdrawals when you reach 70-1/2, if you haven't already done so.

  • IRA -- As is the case with your 401(k), you will in most cases have to pay a 10 percent penalty tax if you take distributions from your IRA before age 59-1/2. And you must begin taking required minimum distributions from a traditional IRA once you reach 70-1/2. If you have a Roth IRA, you face no mandatory distribution rules, so you never have to touch the money, which means it can potentially grow tax free for years.
  • Social Security -- You can start taking Social Security when you reach 62, but your monthly payments will only be about 70 percent to 75 percent -- the exact amount depends on your age -- of your payments if you wait until you reach "full" retirement age, which is probably 66 or 67. (Social Security determines your full retirement age by your year of birth.)

To most effectively incorporate your 401(k) and IRA withdrawals and Social Security payments into your retirement income, you'll need to consult with your financial adviser.

Also, to make sure you're not adversely affecting your tax situation when you start taking these withdrawals and payments, talk to your tax adviser.

But don't wait until you're almost retired to start preparing for it. Your decisions on when to take withdrawals from your various retirement accounts are usually irrevocable -- so you'll want to get them right the first time.

Scott Flake is a licensed financial adviser with the firm of Edward Jones. He hosts a weekly informal investment discussion on Tuesdays at 10 a.m. at his office at 411 S. Beeline Highway, Suite B. For more information, call him at (928) 468-1470.

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