If you’re like most retirees, you’ve spent much of your career accumulating assets to fund your retirement. You’ll likely rely on those assets to generate a portion of your retirement income. While you will probably have Social Security income and possibly even a pension, you may also need income from your savings.
Even if you’ve saved a substantial amount for retirement, it can be difficult to know how much to withdraw each year. If you take too much, you could deplete your savings and put yourself in a challenging financial situation later in life. Take too little, and you may struggle to cover your living expenses.
A popular strategy is to take 4 percent of your savings balance each year as a retirement distribution. The idea behind this recommendation is that 4 percent is a modest amount that will allow your savings to continue to grow. It’s also a simple approach that makes it easy to plan your distributions.
The IRA is one of the most popular available retirement savings vehicles. Americans hold nearly $2.5 trillion in individual retirement accounts (IRAs). Those nearing retirement, between the ages of 60 and 64, have an average of $165,139 in their IRA.1 If you own an IRA, you may rely on it in retirement to generate a substantial portion of your income.
IRAs are popular because of their unique tax treatment. Some IRAs, such as traditional IRAs or SEP IRAs, allow you to take a deduction for contributions, assuming you meet income guidelines. All IRAs offer tax deferral, which means you don’t pay taxes on growth as long as your funds stay inside the account.