In my last post I talked about how to manage your 401k. But, when the time comes, what’s the formula for withdrawing? 

This is where things get a little morbid. How long do you think you’ll need them is a polite way of asking when you think you’ll call it quits from this mortal coil. Given people are living longer and given the consequences of underestimating lifespan, I’m guessing 90 is a reasonably good guess. 

The first thing you need to know is that 401k withdrawls are taxed just like a paycheck. The bigger your withdrawls, the more you pay in tax. And you’ll be the one writing the check; financial companies don’t offer a service to send the IRS money with each withdrawal (at least none that I know of).

I recommend opening a separate savings account in a bank that’s not your primary bank. I call this the “hidden savings account”. Whenever I withdraw from our 401ks I plan to set aside a portion of that withdrawal and deposit it into our hidden savings account. When the time comes to pay our taxes I’ll just transfer the amount needed to my checking and done-zo.

How much to set aside for taxes? Add up your Social Security income, any passive income, annuities, pension payments, along with your 401k withdrawal and use an online estimator (like NerdWallets most handy tool at https://www.nerdwallet.com/taxes/tax-calculator…) to rough it out. It may not be 100% accurate but you’ll land close enough to not have to sell a kidney every April 15. 

But, again, how MUCH should you withdraw? Easy peasy. Remember the morbid exercise in guessing your own mortality? Figure out how long you think you’ll be withdrawing (age at demise – age at retirement) then divide your total 401k balance by those number of years. 

For example, say your 401k is worth $100k. Let’s assume you want to retire at 67 and you estimate you’ll live to age 90. Here’s the math:

100,000 / (90-67) which is 100,000 / 23 = 4,347.83

So you’d withdraw roughly $4350 a year starting at age 67. You could withdraw the monthly equivalent ($362.50) but that sounds like a pain to me so I’m going to do it once a year only.