Running out of money is a major concern for retirees. Social Security alone is not enough to finance anything but the most austere lifestyle, and few retirees are lucky enough to have a substantial pension from a former employer, so the bulk of retirement income must come from savings. If you're already retired, you can't do anything about how much you saved -- but you can optimize your management practices and stretch your money a bit further that way.

Managing your distributions

How and when you take money out of your accounts has a huge impact on whether those accounts flourish or wither on the vine. Most retirees have several different types of accounts: a tax-deferred retirement account such as a traditional IRA or 401(k); a standard brokerage account; a bank savings account; and perhaps a Roth account. Distributions from each of these accounts will have an entirely different effect on your tax bill for the year, which means that if you took exactly the same amount of money from each of these types of accounts, you'd actually end up with different amounts of income.

The rule of thumb for retirees is to start by taking distributions from a standard brokerage account; switch to a tax-deferred retirement account once the standard brokerage account empties out; and finally turn to the Roth account when the others are exhausted (leave your bank savings account alone so that you can save the money for emergencies).

However, this approach doesn't take some factors into account. For example, if you plan to leave as much as possible for your heirs, you are better off not taking funds from your brokerage account. When the investments in a standard brokerage account are inherited by a beneficiary, any gain you have on those investments is "reset." So an investment that, if sold by you, would generate an enormous tax bill, will have no tax expenses at all if your beneficiary inherits it and immediately sells it.

Nest egg sitting on money

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Tax planning for retirees

It's also important to consider how much of a tax bill you're generating through your distributions. Briefly, distributions from traditional IRAs and 401(k)s are taxed as income, distributions from a standard brokerage account may be subject to capital gains taxes, and distributions from Roth accounts are not taxed.

Taking the majority of your distribution from a traditional tax-deferred retirement account is wise in the sense of leaving your Roth account to grow as much as possible, but it may also generate an unmanageable tax bill for the year, especially if the large amount of taxable income causes your Social Security benefits to become taxable too. Thus, it may be a better idea to split the distribution between taxable and nontaxable income sources in such a way that you minimize your tax bill.

For example, let's say you're single and you need $40,000 of income from your accounts to pay your expenses. If you take a distribution entirely from a traditional IRA, you'll actually need withdraw close to $50,000 in order to have $40,000 in income; the rest will go to pay your federal income taxes. If you live in a state that taxes retirement distributions, you'll need to take even more. But if you take the money from your Roth account instead, you can take just $40,000 because the distribution is not taxable. You can see how planning your distributions with taxes in mind can make a huge impact on how long your accounts will last. Most retirees can't just take money from their Roth accounts because the required minimum distribution rules kick in at age 70 1/2; however, keeping your tax-deferred account distributions as small as possible can save you a bundle on taxes.

Managing your investments

Of course, in order to take that distribution from any of your retirement savings accounts, you'll usually need to sell some investments to generate the cash you need. This triggers another important financial decision: Which investments should you sell to generate that cash?

The annual distribution is an ideal time to rebalance your investments. It's important to split your funds correctly between stocks and bonds; however, the ideal balance between these two types of investments will shift as you get older. You can use the formula of 110 minus your age to determine what percent of your money should be in stocks, with the remainder in bonds. For example, if you're 75, 35% of your money should be in stocks and the remaining 65% in bonds. So if you pull up your account statement and you actually have 40% of your money in stocks, you should start by selling some stocks. If selling enough stocks to get to the desired 35% of your portfolio doesn't generate enough income for your needs, then split the rest of your sales between stocks and bonds to keep the proportions right.

One thing you don't have to consider with any tax-advantaged retirement account is whether or not you have any gain on the investment you're selling. That's because investments inside IRAs and 401(k)s (and related accounts, such as 403(b)s) are not subject to capital gains taxes. You may, however, wish to sell stocks or bonds whose companies are the subject of alarming news stories. If the company is in clear financial trouble, dumping your stake in that company can substantially reduce your risk. And for retirees, reducing risk is the name of the game.

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