Retirement funds allow us to withdraw from them periodically (monthly or annually). Typically, such funds tend to also have a withdrawal window of about forty years or so. In other words, we would be allowed to withdraw from these starting, say, in our sixties and continue withdrawing till our death.
The longer we postpone our withdrawal date, the bigger the amount we can withdraw. Just as an example, a fund with $100,000 that allows us to withdraw $500 annually if we start withdrawing at the age of 60 may allow us to withdraw $700 annually if we wait for 10 more years to start withdrawing. The fund is able to do this by being able to grow more during the 10 additional years.
How is this flexibility in withdrawal start date useful for us? And how does this affect us? There are both pros and cons for early and late withdrawals.
Early withdrawal amount = $500 Late withdrawal amount = $700 Delay period = 10 yearsSuppose:
Our early withdrawal age = 60 Late early withdrawal age = 70 (60 + delay period, i.e., 60 + 10)If we decide to start withdrawing at age 70, it will take us approximately 7 years to "break even", i.e., reach the amount that we've missed by not starting to withdraw at the age of 60 ($500 x 10 years = $5000; $700 x 7.15 years = $5005). That is, we'd have to wait till the age 77 in order to reach $5000 that we could have reached at age of 70, had we started withdrawing at the age of 60.
NOTE: The above is a contrived example. Check your fund's information to learn the early and late withdrawal amounts and the delay period.
In addition, the withdrawal itself adds to our annual income and there could be tax implications (if the money that we withdraw from the retirement fund is taxable). The tax depends on our total income for each year, and is a bit advanced for us to discuss here. Your tax professional is the best person to talk to to understand this, before we plunge into taking a decision.
Deciding to withdraw earlier or later is not a easy decision, since both have their pluses and minuses. A good financial planner who understands your total investment portfolio, income sources, etc., is the best person to ask questions about these.