Elder Law FAX The September 25, 2006, issue of Elder Law FAX, a free newsletter published every other Monday by the Elder Law Practice of Timothy L. Takacs.   Beyond Conventional Wisdom: New Strategies for Lifetime Income A report from Fidelity Investments' new Fidelity Research Institute offers new strategies to guide retirees and retiring Baby Boomers in maximizing lifetime income.   In its report, "Beyond Conventional Wisdom: New Strategies for Lifetime Income," the Institute offered answers to a series of questions, such as: when is the best time to retire? What difference might delaying a few years make? What rate of withdrawal from retiree assets is sustainable -- and does that rate change with age? In what order should funds be drawn from retirement accounts to maximize after-tax income? And what rules of thumb might retirees consider breaking?   The report examines much of the "conventional wisdom" embedded in common financial practice today to determine just how wise it really is.   A key factor in making the "timing" decision is the varying levels of withdrawal from retirement assets that are "sustainable" to and beyond life expectancy, says the Institute report. Conventional wisdom -- the rough rule of thumb used by many financial advisors -- suggests that a withdrawal rate of 4% or less is an appropriate and sustainable level to begin with. But a more analytical look suggests this "4% solution" is too simplistic -- and that sustainable withdrawal rates actually rise with age.   Likewise, the decision on when to start collecting Social Security is an important element in a retiree's overall retirement income plan. The single most important consideration for making the decision is anticipated longevity. People will get the most Social Security if they delay drawing benefits until age 70 and live for a long time.   Which Retirement Savings Accounts to Draw From: In the Right Order The Institute report recommends this basic "withdrawal hierarchy" which will be useful in guiding most -- though not all -- retirement income plans.   1. Take your minimum required distributions (MRDs). If you are age 701/2 or older, make sure you know which of your accounts require such distributions and how large those distributions need to be, then meet the deadlines to avoid the 10% penalties that will be assessed if you fail to take your required distributions.   2. Liquidate loss positions in taxable accounts. Some investments in your taxable accounts may be worth less than their tax basis (generally the amount you paid to acquire them). In addition to offsetting (netting) realized losses against realized gains, at the federal level you can usually use up to $3,000 ($1,500 for married couples filing separately) of net losses each year to offset ordinary income such as interest, salaries, and wages. Unused losses can usually be carried forward for use in future years.   3. Sell assets in taxable accounts that will generate neither capital gains nor capital losses. Such assets might include money market funds or other cash-equivalent investments. If your withdrawals from this tier in the hierarchy largely come from cash-equivalent investments, be sure to leave sufficient liquid assets investments intact to cover any short-term financial emergencies.   4. Withdraw money from taxable accounts or tax-deferred saving vehicles funded with at least some nondeductible (or after-tax) contributions, such as variable annuities and Traditional IRAs. The choice depends on the circumstances, and in some cases, it might make more sense to tap the tax-deferred vehicle first.  When liquidating gain positions in taxable accounts, it usually makes sense to sell assets with long-term capital gains first, since they should be taxed at lower rates than short-term gains are. In addition, consider liquidating assets that are likely to generate smaller taxable gains when expressed in dollar terms. The report cautions: If you are thinking of leaving assets to beneficiaries, this fourth guideline may not serve you well.   5. Withdraw money from tax-deferred accounts funded with deductible (or pre-tax) contributions such as 401(k)s and Traditional IRAs or tax-exempt accounts such as Roth IRAs.   "Understanding when, and to what extent, to tap into each income stream could determine whether a person has substantially more money to live on in retirement or whether they outlive their savings," said W. Van Harlow, Ph.D., managing director of research for the Fidelity Research Institute, in a press release.   The report, "Beyond Conventional Wisdom: New Strategies for Lifetime Income," can be viewed here: http://www.fidelityresearchinstitute.com/_pdf/Beyond_Conventional_Wisdom.pdf