It is important to manage your retirement savings nest egg once you've reached retirement, so that you don't run out of money.

You've built your retirement nest egg with your 403(b) or 457 plan. You’ll want to devise a sound strategy for drawing on your savings in retirement. You'll need to consider your personal and financial situation, goals, age, and types of investments. 

Here are some things to consider. 

Are your investments appropriate for your stage of life?

As you age, you’ll likely want to assume less risk since you no longer have as much time to ride out unexpected losses. Once retired, your position on the risk-tolerance continuum shifts from protecting savings to maximizing income. You’ll want to revisit your risk tolerance and rebalance within asset classes where necessary. Depending on the age you retire, consider how long you expect to need your retirement assets for financial support. Often, with an expectancy of living 20+ years in retirement, it’s still appropriate to invest in strategies that have the ability to produce returns in excess of inflation over time.

Adjust your spending

A familiar “formula” has been to limit the first year’s portfolio withdrawal to 4% of the total portfolio and then adjust for inflation thereafter. But this model doesn’t address individual circumstances such as life expectancy, medical costs, and rising taxes; thus, building flexibility into your portfolio is essential. Scrutinize your consumer habits and the ways you may be wasting money. It’s likely that you can live contentedly on less.

Prioritizing your withdrawals

Many financial experts suggest withdrawing from taxable accounts first in order to let tax-deferred accounts continue to grow as long as possible. However, there are some  instances when taking money out of your tax-advantaged accounts may make sense. 

Leveraging your tax situation

If you have a Roth IRA and need cash for expenses, you may want to look at some combination of withdrawals from your Roth IRA and your 403(b) or 457 plan. Since qualified withdrawals from a Roth IRA are tax-free, taking some distributions from the Roth IRA and some from your tax-deferred 403(b) or 457 plan and taxable accounts may help keep you from crossing a tax bracket threshold. You may want to review your situation with a tax advisor to help determine the best course of action in your specific situation.

Leaving money to heirs

Distributions from inherited 403(b) and 457 plan accounts are taxed at the recipient’s ordinary income tax rate, which can be as high as 35%. However, beneficiaries may be able to take money out of an inherited Roth IRA without being subject to income taxes on the amount. Money inherited from a taxable account benefits from a step-up in basis, which typically reduces the amount of capital gains taxes due upon the sale. It may make sense to draw down your 403(b) or 457 plan first if your goal is to leave the maximum amount of money to your heirs.

Rebalancing your investments

If some of your money is tied up in highly volatile investments–say, aggressive growths stocks–in taxable accounts, you may want to start drawing those down to reduce your investment risk.

RMD withdrawals

Your options for withdrawals become more limited once you reach the age for required minimum distributions (RMDs). You must start taking annual distributions based on IRS life expectancy tables from 403(b) and 457 plans, as well as from traditional Individual Retirement Accounts (IRAs), by April 1 of the year after the year you turn age 70½.

If you don’t make your RMD withdrawals you may face a 50% penalty on the amount that should have been withdrawn, but wasn’t. Traditional 403(b) plans, 457 plans, and IRAs have RMDs. Roth IRAs and Roth 403(b) plans do not have RMDs during the original account holder’s lifetime.

Make your money last

It’s wise to meet with a financial advisor to help develop a strategy for taking distributions that meet your tax and financial goals, and to help ensure that your money lasts as long as you do. A financial advisor can run financial simulations that illustrate the potential impact of various withdrawal rates and hypothetical rates of return over time. For information on how to select a financial advisor, go to Choosing a Financial Advisor.