A: Overall most retirees appear to be using one of two methods: straight systematic withdrawal from mutual funds inside their IRA, or laddering. More appear to be interested in converting retirement funds into income rather than taking out a lump sum. An estimate of people using annuities is in the 10-15% range.

There are five traditional approaches, along with their many variations, that you should familiarize yourself with. In this issue we will discuss two of the five.

Systematic withdrawal plan:

Pluses: These are easy for retirees to implement. They just call their fund and ask for a percentage or flat amount of their balances to be drawn from various funds in their IRA or other vehicle. Systematic withdrawal allows retirees to receive distributions from their IRA, while letting their money continue to grow with a tax advantage. You should remind them when they reach 70 ½ years, the IRS will determine the minimum amount they have to withdraw on an annual basis.

Minuses: This method leaves your clients account exposed to market risk. If the market heads south and their overall portfolio decreases, periodic withdrawal of a percentage of funds means their income will also decline. If they are withdrawing a flat amount periodically, they will begin to eat into their principal faster.

Withdraw only interest and dividends (leave principal alone):

Pluses: This is another easy implementation for retirees. They just call their fund and ask for only investment earnings to be sent from all funds.

Minuses: This method also exposes your client to market risk. Like systematic withdrawal, if the market heads south their overall portfolio may decrease. Periodic withdrawal of a percentage of funds would mean their income will also decline. If they are withdrawing a flat amount periodically, they will begin to eat into their principal faster. Unexpected expenses can decrease the principal, if the retiree needs to withdraw more than fund earnings.

Neutral: Principal doesn’t grow. Depending on how comfortable your client feels about their account balance, this can be a plus or minus.

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