Converting Savings to Retirement Income

Converting Savings to Retirement IncomeDuring your working years, you’ve probably set aside funds in retirement accounts such as IRAs, 401(k)s, or other workplace savings plans, as well as in taxable accounts. Your challenge during retirement is to convert those savings into an ongoing income stream that will provide adequate income throughout your retirement years.

Setting a withdrawal rate

The retirement lifestyle you can afford will depend not only on your assets and investment choices, but also on how quickly you draw down your retirement portfolio. The annual percentage that you take out of your portfolio, whether from returns or both returns and principal, is known as your withdrawal rate. Figuring out an appropriate initial withdrawal rate is a key issue in retirement planning and presents many challenges. Why? Take out too much too soon, and you might run out of money in your later years. Take out too little, and you might not enjoy your retirement years as much as you could. Your withdrawal rate is especially important in the early years of your retirement, as it will have a lasting impact on how long your savings last.

One widely used rule of thumb on withdrawal rates for tax-deferred retirement accounts states that withdrawing slightly more than 4% annually from a balanced portfolio of large-cap equities and bonds would provide inflation-adjusted income for at least 30 years. However, some experts contend that a higher withdrawal rate (closer to 5%) may be possible in the early, active retirement years if later withdrawals grow more slowly than inflation. Others contend that portfolios can last longer by adding asset classes and freezing the withdrawal amount during years of poor performance. By doing so, they argue, “safe” initial withdrawal rates above 5% might be possible. (Sources: William P. Bengen, “Determining Withdrawal Rates Using Historical Data,” Journal of Financial Planning, October 1994; Jonathan Guyton, “Decision Rules and Portfolio Management for Retirees: Is the ‘Safe’ Initial Withdrawal Rate Too Safe?,” Journal of Financial Planning, October 2004.)

Don’t forget that these hypotheses were based on historical data about various types of investments, and past results don’t guarantee future performance. There is no standard rule of thumb that works for everyone—your particular withdrawal rate needs to take into account many factors, including, but not limited to, your asset allocation and projected rate of return, annual income targets (accounting for inflation as desired), and investment horizon.

Which assets should you draw from first?

You may have assets in accounts that are taxable (e.g., CDs, mutual funds), tax deferred (e.g., traditional IRAs), and tax free (e.g., Roth IRAs). Given a choice, which type of account should you withdraw from first? The answer is—it depends.

For retirees who don’t care about leaving an estate to beneficiaries, the answer is simple in theory: withdraw money from taxable accounts first, then tax-deferred accounts, and lastly, tax-free accounts. By using your tax-favored accounts last, and avoiding taxes as long as possible, you’ll keep more of your retirement dollars working for you.

For retirees who intend to leave assets to beneficiaries, the analysis is more complicated. You need to coordinate your retirement planning with your estate plan. For example, if you have appreciated or rapidly appreciating assets, it may be more advantageous for you to withdraw from tax-deferred and tax-free accounts first. This is because these accounts will not receive a step-up in basis at your death, as many of your other assets will.

However, this may not always be the best strategy. For example, if you intend to leave your entire estate to your spouse, it may make sense to withdraw from taxable accounts first. This is because spouses are given preferential tax treatment with regard to retirement plans. A surviving spouse can roll over retirement plan funds to his or her own IRA or retirement plan, or, in some cases, may continue the deceased spouse’s plan as his or her own. The funds in the plan continue to grow tax deferred, and distributions need not begin until the spouse’s own required beginning date.

The bottom line is that this decision is also a complicated one. A financial professional can help you determine the best course based on your individual circumstances.

Certain distributions are required

In practice, your choice of which assets to draw first may, to some extent, be directed by tax rules. You can’t keep your money in tax-deferred retirement accounts forever. The law requires you to start taking distributions—called “required minimum distributions” or RMDs—from traditional IRAs by April 1 of the year following the year you turn age 70½, whether you need the money or not. For employer plans, RMDs must begin by April 1 of the year following the year you turn 70½ or, if later, the year you retire. Roth IRAs aren’t subject to the lifetime RMD rules.

If you have more than one IRA, a required distribution is calculated separately for each IRA. These amounts are then added together to determine your RMD for the year. You can withdraw your RMD from any one or more of your IRAs. (Your traditional IRA trustee or custodian must tell you how much you’re required to take out each year, or offer to calculate it for you.) For employer retirement plans, your plan will calculate the RMD, and distribute it to you. (If you participate in more than one employer plan, your RMD will be determined separately for each plan.)

It’s important to take RMDs into account when contemplating how you’ll withdraw money from your savings. Why? If you withdraw less than your RMD, you will pay a penalty tax equal to 50% of the amount you failed to withdraw. The good news: you can always withdraw more than your RMD amount.

Annuity distributions

If you’ve used an annuity for part of your retirement savings, at some point you’ll need to consider your options for converting the annuity into income. You can choose to simply withdraw earnings (or earnings and principal) from the annuity. There are several ways of doing this. You can withdraw all of the money in the annuity (both the principal and earnings) in one lump sum. You can also withdraw the money over a period of time through regular or irregular withdrawals. By choosing to make withdrawals from your annuity, you continue to have control over money you have invested in the annuity. However, if you systematically withdraw the principal and the earnings from the annuity, there is no guarantee that the funds in the annuity will last for your entire lifetime, unless you have separately purchased a rider that provides guaranteed minimum income payments for life (without annuitization).

In general, your withdrawals will be subject to income tax—on an “income-first” basis—to the extent your cash surrender value exceeds your investment in the contract. The taxable portion of your withdrawal may also be subject to a 10% early distribution penalty if you haven’t reached age 59½, unless an exception applies.

A second distribution option is called the guaranteed* income (or annuitization) option. If you select this option, your annuity will be “annuitized,” which means that the current value of your annuity is converted into a stream of payments. This allows you to receive a guaranteed* income stream from the annuity. The annuity issuer promises to pay you an amount of money on a periodic basis (e.g., monthly, yearly, etc).

If you elect to annuitize, the periodic payments you receive are called annuity payouts. You can elect to receive either a fixed amount for each payment period or a variable amount for each period. You can receive the income stream for your entire lifetime (no matter how long you live), or you can receive the income stream for a specific time period (ten years, for example). You can also elect to receive annuity payouts over your lifetime and the lifetime of another person (called a “joint and survivor annuity”). The amount you receive for each payment period will depend on the cash value of the annuity, how earnings are credited to your account (whether fixed or variable), and the age at which you begin receiving annuity payments. The length of the distribution period will also affect how much you receive. For example, if you are 65 years old and elect to receive annuity payments over your entire lifetime, the amount of each payment you’ll receive will be less than if you had elected to receive annuity payouts over five years.

Each annuity payment is part nontaxable return of your investment in the contract and part payment of taxable accumulated earnings (until the investment in the contract is exhausted).

*Guarantees are subject to the claims-paying ability of the issuing insurance company.

Contact our Peoples Investment Services, Inc. representative at 828-464-5620 or 

This information, developed by an independent third party, has been obtained from sources considered to be reliable, but Raymond James Financial Services, Inc. does not guarantee that the foregoing material is accurate or complete. This information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. This information is not intended as a solicitation or an offer to buy or sell any security referred to herein. Investments mentioned may not be suitable for all investors. The material is general in nature. Past performance may not be indicative of future results. Raymond James Financial Services, Inc. does not provide advice on tax, legal or mortgage issues. These matters should be discussed with the appropriate professional.

Securities offered through Raymond James Financial Services, Inc., member FINRA/SIPC, an independent broker/dealer, and are not insured by FDIC, NCUA or any other government agency, are not deposits or obligations of the financial institution, are not guaranteed by the financial institution, and are subject to risks, including the possible loss of principal.

Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2014

How to choose an anti-virus, anti-malware solution

How to choose an anti-virus, anti-malware solutionNo rational person would think it smart to operate a computer that is unprotected against virus’ and other mean-spirited software (also known as “malware”). The problem comes in deciding which option to use.

It can be a complicated process to narrow down the most appropriate options. However, there is a simple and effective way to make a good decision. Here is our two-step guide that will give you a few options to choose from, depending on whether you are looking for a personal computer or office computer anti-malware solution.

What Kind of Computer is it for? Check out the better choices.

Choose anti-virus solutions for the type of computer it will run on:
Personal computer options

Office computer options

What’s the difference?
What is the difference between the recommendations for personal computers and that for office computers? Businesses need to be able to install software that will give them a birds’-eye view of the office computers – whether the anti-virus software is running, up-to-date, and if there is a virus, that it has been quarantined and contained. The more computers you are responsible for, the more you need a “managed” software solution.

For example, say you have an office with 10 or more computers in it. You don’t want to have to install the software on each PC (Windows or Mac), and you for sure don’t want to have to manually update their virus definitions every day. Business solutions solve that management problem for you, in addition to having other features.

Peoples Bank wants the families and businesses in the community to thrive, and be free from digital threat. Make sure you have a good anti-virus software running on all the computers you use. This is an important element to your online protection strategy.

If you’re running Windows XP, your shredder may not be helping you

If you’re running Windows XP, your shredder may not be helping you.Here is a story we heard and would like to pass along. “My wife has a little cleaning job for an elderly couple we like helping. They’re nice. They give us chocolate. They are obsessed with shredding any paper that might have their name or any other identifier on it, for they are terrified of someone stealing their money or their identity. They have two big shredders with special blades for destroying both catalogs and bank statements. The problem is their shredders aren’t the full-scale protection they think. You see, they conduct financial transactions with their brokerage and manage their bank accounts online with an old computer running Windows XP.” Their computer has probably left open the only door that matters. Do you have that security risk?

A brief history of Windows XP and its successors

In August 2001, Microsoft released its newest, most stable and secure operating system to-date. They called it Windows XP. You may remember what a great advance this operating system was. Mick Jagger introduced its new Start button to a rocking audience of enthusiasts. It had all the benefits of Windows NT without the clunky interface but with nice, rounded edges to the graphical elements. It quickly became the de facto standard for just about every computer system in the world, but had to get 3 major “service pack” updates for security and stability demands. Now, 13 years later, Windows XP still runs on something like 34% of the desktop computers in the world.

Since Windows XP was released, Microsoft introduced 2 new replacement operating systems for personal computers, each to make it both easier and safer to use personal computers. But most important, each of these new operating systems, Windows 7 and Windows 8, brought better security technology to the desktop. They are far and away preferred over Windows XP to protect sensitive information from the bad guys. Which brings us to why running Windows XP is a security problem.

What Windows XP “End of Life” means for users

So what’s the risk? Data breach. And, no viable restitution recourse. It’s not like we weren’t warned and given time to prepare, to upgrade to a more secure platform.

Microsoft began warning of the Windows XP End of Life 2 years ago, in April of 2012. And, true to their word, in April of 2014, Microsoft stopped supporting Windows XP. From a security perspective this is significant. It means that Microsoft will no longer provide security updates to protect the system from hackers; no more patches to fight against harmful viruses, spyware and other malicious software that could steal your personal information. It also means that there will be no more system updates to improve the reliability of the computer system. Sure, you could find some software to protect against malware, but not software that can detect core system intrusions.

A well-known security firm has posted more than 350 known Windows XP vulnerabilities that will not be patched by Microsoft.

In our opinion, and that of even the least conservative expert, organizations having Windows XP machines in operation (desktops, laptops, virtual machines) should make every effort to replace that machine or remove its connection to the organization’s network.

The favorite elderly couple was told that their next purchase should be a new, more protected computer while they destroy the hard drive in that Windows XP machine. And, now we’re saying the same thing to one of our favorite people. You.


Here’s how to learn more. Click on the links below: