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What's the best way to withdraw money from my savings?

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Follow these straightforward suggestions for creating a steady stream of retirement income.

You know how to save for retirement—you've been doing it for years. But what's the best way to withdraw money from your retirement accounts when you're ready to start spending your savings?

Here is additional insight to help you decide on your approach.

Ideally, you'd simply live off the dividends and interest your retirement savings earn—and not have to spend down your savings at all. But that would take a very large portfolio. If you’re like most people, your annual withdrawals will likely come from a combination of dividends, interest, and proceeds from thoughtfully selling your investments over time.

If you need to sell investments, a good time to do it is when you rebalance your portfolio each year. For example, if your target allocation is 60% stocks and 40% bonds, but your portfolio is now 65% stocks and 35% bonds, you could cash out what you need from the stock portion to get your portfolio back on target.

Divide the remainder of your money among stock, bond, and cash investments. It's usually best to sell investments in taxable accounts first, before you take money out of tax-deferred accounts like Individual Retirement Accounts (IRAs) and 401(k)s. That's because proceeds from tax-deferred accounts are taxed as ordinary income, which is typically taxed at a higher rate than you'd pay on proceeds from selling investments from taxable accounts. Tapping your IRA also means losing the opportunity for tax-deferred compound growth to continue.

To accommodate factors such as taxes and investment performance, we recommend withdrawals of your retirement money in this order:

  1. Draw principal for maturing bonds and CDs.
  2. Take your required minimum IRA distribution if you're 70½ or older to avoid a 50% penalty.
  3. Rebalance your portfolio yearly and sell investments in overweighted asset classes (e.g., stocks or bonds) in your taxable accounts. Sell investments with the poorest ratings (e.g., Schwab Equity Ratings® of D or F or Morningstar ratings of one or two stars) first.
  4. Sell from your tax-advantaged accounts—first Traditional IRAs and 401(k)s, then Roth IRAs.

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