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.

Pros and Cons

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.

Reasons Not to Withdraw Early

• The longer we wait (until the late withdrawal date), the bigger the withdrawal amount becomes.
• Once we start withdrawing, we're essentially locking in the periodic withdrawal amount. It'll never increase.
• In the case of social security, which is essentially a government-managed retirement fund, the government also announces a Cost Of Living Adjustment (referred to as COLA) every so often. COLA is specified as a percentage of the annual withdrawal amount and is applicable to anyone that whose withdrawal date starts from when the COLA is effective. However, once we lock our the periodic withdrawal amount, any future increases in COLA will have no effect for us. (In other words, even the COLA amount is locked in for us when we start withdrawing.)

Reasons to Withdraw Early

• We have access to the money sooner.
• If we wait for the delay period in the hope of withdrawing a higher amount and happen to pass away during the delay period, we would have lost any amount that we could have withdrawn, had we started earlier.
• If we postpone our withdrawal date, we're essentially missing the withdrawal amount between the early and late withdrawal dates. If we take the example described earlier:

  
      Early withdrawal amount     = $500
      Late withdrawal amount      = $700
      Delay period                = 10 years

  Suppose:
  

  
      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.

• If we have access to other investment vehicles that could provide us a higher return (than the rate at which the retirement fund grows), we could choose to invest the withdrawn money (fully or a portion of it) sooner and make it grow faster than what we would get if we wait till the late withdrawal date.

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.

Summary

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.