What Mike Tyson Can Teach You About Retirement

Mike Tyson lands a left on Frank Bruno of Great Britain
Al Bello/Getty ImagesMike Tyson, left, lands a left on Frank Bruno during a 1996 championship fight in Las Vegas.
By Robert Berger

Conventional wisdom tells us that a reasonable withdraw rate from our retirement nest egg is 4 percent. Some experts suggest a smidge lower, while others say you can withdraw a little more. Regardless, this rule of thumb is helpful in planning for retirement. The key word there is planning.

That reminds of me of what one retiree, former undisputed heavy-weight champion of the world Mike Tyson, said about planning: "Everybody has a plan until they get punched in the face."

Planning is the easy part. When you're decades away from retirement, it's easy to sit in front of your computer admiring a pretty spreadsheet full of projections, hypotheticals and assumptions. In our more ambitious moments, we may even crack open a Monte Carlo simulator, which I'm convinced was designed to make us feel much smarter than we really are.

But what will we do when we get punched in the face? In retirement speak, that moment comes when we sit in front of our computer, not to admire our planning spreadsheet, but to hit the submit button to execute a transfer out of our retirement plan. Gulp.

Although I'm a number of years away from retirement, I've been giving a lot of thought to how I'll make withdrawals from my accounts during retirement. My conclusion is that the 4 percent rule, while perfectly fine for planning purposes, won't help me much when I'm in the ring with retirement.

Instead, here are three factors worth considering for those ready to start living on their retirement funds:

The 4 percent guideline. The 4 percent withdrawal rate is more of a guideline than an actual rule. During retirement, having the flexibility to vary the amount withdrawn from retirement accounts has two distinct benefits. First, it allows a retiree to adapt to changing needs. One year may require more or less capital than the next.

Second, varying the amount of withdrawals enables one to react to market conditions. When the market is overvalued, you could take out enough cash to cover expenses for several years. The extra cash could help you avoid the need to withdraw significant funds when the market inevitably declines.

%VIRTUAL-article-sponsoredlinks%Selecting the investments. Deciding how much to take from retirement accounts is just the beginning. You also have to decide which investments to sell. Part of this decision may be driven by your asset allocation plan. Withdrawals can be taken from stock and bond mutual funds and ETFs in amounts designed to maintain the allocation you've chosen during retirement.

Perhaps a more important consideration is the performance of the investments. One of the hardest things to do as an investor is to buy low and sell high. We tend to want to keep the "winners" and sell the "losers." The result is a repeating cycle of buying high and selling low. Selling investments that have outperformed the market, while keeping those that are lagging, may help your nest egg last longer.

Taxes. Taxes should always be a consideration. Withdrawals from some retirement funds, like a 401(k) or deductible IRA, are taxed as ordinary income. Distributions from a Roth IRA are tax free. And distributions from investments in a taxable account typically trigger a combination of short and long-term capital gains on a portion of the withdrawal. The key is to consider the tax consequences before deciding which accounts to tap.

Of course, required minimum distributions must be factored into the decision. Beyond the RMD, a little tax planning can go a long way. For example, distributions could be designed to keep a retiree in a certain tax bracket. If tax changes will go into effect, as they did this year with changes to the capital gains rate, withdrawals in the previous year could be designed to avoid the tax hike.

Now let me get back to my pretty spreadsheet.

Rob Berger is an attorney and founder of the popular personal finance and investing blog, doughroller.net. He is also the editor of the Dough Roller Weekly Newsletter, a free newsletter covering all aspects of personal finance and investing.

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What Mike Tyson Can Teach You About Retirement
For years, security professionals have emphasized the importance of shredding your personal documents before you throw them out. But Holland notes that shredding isn't as much of a priority as it used to be. "There aren't nearly as many documents with personal information out there as there were even just two years ago," he explains. "These days, it's much easier to get your information off your computer."

Passwords are your first line of defense against intruders. But, as Holland points out, even the most careful people sometimes have password breaches. "I've helped chief privacy officers from health care and security firms," he notes. "If they're getting hit, then anyone is vulnerable." While Holland notes the importance of having a good password, he emphasizes that the most important thing is paying attention to password breach notifications. If you hear that one of your passwords may have been breached, he counsels, change it immediately. And, because many of your accounts may be linked, he notes, it's not a bad idea to change the rest of your passwords as well.

One piece of advice that you don't often hear is to keep on top of software updates. But, Holland argues, updating your operating system, your software, and your security programs is one of the easiest and most important ways to ensure your security. Software companies spend a lot of time and money trying to stay ahead of online intruders -- it only makes sense to take advantage of their work.
Even if you are convinced that your security is state-of-the-art and your password is unbreakable, it never hurts to double-check your most sensitive accounts. Holland suggests regularly checking your bank and credit card statements to ensure that there aren't any inappropriate charges on your accounts. As a side benefit, this is also a great way to catch any unexpected fees that your bank may try to spring on you.
When a breach happens, a fast response can mean the difference between a minor annoyance and a major pain in the neck. With that in mind, Holland suggests talking to your bank about having transaction alerts placed on your account. Every time your account is credited with a transaction over a particular amount -- $50, for example -- your bank will send you an e-mail or text notification. If it's an expected transaction, you can discard the message; if not, you'll be able to respond immediately.
Every year, you are entitled to a free credit report from each of the reporting bureaus. Holland suggests taking advantage of this free service, noting that your credit report is a great way to track your outstanding debts and ensure that nobody is trying to open false accounts in your name. He emphasizes, however, that the best way to get your free report is by going to AnnualCreditReport.com, not FreeCreditReport.com. "That site's a scam," he laughs.
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