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Tapping retirement investments: 4 tips to avoid running out of money

Barbara Marquand | guest writer for GoTalkMoney

by Barbara Marquand

Most baby boomers fear outliving their retirement savings more than they fear death, according to a survey conducted this year for Allianz Life Insurance Company of North America.

Of course knowing how much to save and accumulating enough of a nest egg are critical, but just as important is managing withdrawals of retirement assets so investments last a lifetime.

Here are five tips:

1. Plan a reasonable withdrawal rate.

Assuming you have 50 percent to 75 percent of your portfolio in stock, research studies show a safe annual withdrawal rate of assets is between 4 percent and 5 percent, annually adjusted for inflation, according to the National Endowment for Financial Education. (That would be $40,000 to $50,000 a year for a $1 million portfolio.) What if you're more conservative? Withdraw a smaller percentage if you have a larger share of your portfolio in conservative investments, such as bonds.

Financial experts recommend setting up a regular pay schedule for taking withdrawals. Once you've determined the percentage and annual amount of income, decide how you'd like to receive your pay -- monthly, weekly or biweekly. Then divide the annual income. For instance, if you take 5 percent a year on a $1 million portfolio, you'd get $50,000 year, $4,167 a month, $1,923 biweekly or $962 a week.

2. Maximize tax savings on withdrawals from investments.

Draw first from taxable investments -- accounts other than 401(k)s and IRAs -- to give tax-deferred investments more time to grow. Long-term capital gains on these investments are taxed at a lower rate than withdrawals from tax-deferred accounts, which are taxed as ordinary income. Another option for early retirement withdrawals is from tax-free investments, such as municipal bonds.

Delay taking withdrawals from tax-deferred accounts as long as you can until age 70 1/2 when you must make minimum withdrawals to avoid tax penalties. If you have to take money out before then, draw first from tax-deferred accounts made with after-tax dollars, such as annuities. Unlike a 401(k) or traditional IRA, Roth IRAs have no minimum withdrawal requirement at any age, so save withdrawals from a Roth for as long as you can.

3. Keep some assets in a money market account.

It's a good idea to keep a few years worth of withdrawals liquid, such as in a money market account or a high interest savings account. That way you're not forced to sell stocks in a bear market or sell bonds when prices are falling to get money for living expenses. You can also build a CD ladder -- a series of CDs with staggered maturity dates -- to provide steady access to income. Search online for the the best CD, savings account and money market account rates to make your money work for you.

4. Consider annuities.

The National Endowment for Financial Education says to consider investing part of your retirement portfolio in annuities to provide a steady stream of income. Annuities are sold by life insurance companies and guarantee a certain rate of return for a certain period of time or for the rest of your life. Fixed annuities are less risky and more straightforward than variable annuities, but variable annuities offer the potential for greater return. Make sure you take fees into account and understand how an annuity works before you invest.

Talk to a trusted financial advisor and make a game plan for how you'll handle your assets in retirement well before it's time to quit working.

Disclaimer:This content is not provided or commissioned by American Express. Opinions expressed here are author's alone, not those of American Express, and have not been reviewed, approved or otherwise endorsed by American Express. This site may be compensated through American Express Affiliate Program.

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