A Discussion Regarding Deposits, Withdrawals, and How to Keep Yourself Safe

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A Discussion Regarding Deposits, Withdrawals, and How to Keep Yourself Safe

November 7, 2020

Q: How often do you recommend withdrawing money from brokers?

I prefer to do so once a week when I’m actively trading. I don’t leave anything in a broker’s account during a period when I’m rarely trading (like now). Even if you don’t earn any profit that particular week, I do feel it’s beneficial to withdraw regularly. Unfortunately, some brokers do charge you for withdrawing more than once per calendar month (or some specified time period), and may charge something like $30 per non-free withdrawal.

They often do offer the chance to waive the additional withdrawal fees if you upgrade to a higher level account. But this requires pretty large deposit sums so it’s really not doable for too many traders. Getting into the top-tier requires deposits of $/€/£5,000 or $/€/£10,000, which is a ton of money that few people have or want to put into trading as retail traders on offshore sites.

It is really up to you. But my feelings on the matter is that you can never be too safe when it comes to investing your money in these brokers. If for whatever reason your account is emptied, they go out of business unexpectedly, or they are late in processing a withdrawal, it might be a tough process to actually get your money. Just understand that it can be a big liability to leave sums of money in any given account that you can’t afford to lose. You need to have a good amount of trust in the broker you’re trading with, and this is why it’s imperative to read and ask around about various brokers and which ones people are having success with, and ultimately try one out on your own.

That said, I’ve never had an issue in my binary options career (about three years old now, although I haven’t been able to trade continuously). But I still like to be safe by withdrawing money regularly even if it means paying a little bit extra. I mean you do hate to spend the additional fees per month on basically nothing, but going a month without access to the money you deposited is a long time and I think most people wouldn’t feel comfortable doing that.

I also never recommend putting more into your account than necessary. A lot of brokers have $200 minimum deposits, and if you don’t trade amounts higher than that, then I wouldn’t suggest putting more in your account.

Sometimes with money management recommendations, you’ll see “never invest more than 1% of your account balance into any given trade.” For some forms of trading, like forex, that may be relevant. But for binary options, when your risk is limited to only your investment amount in that particular option, I revise that to say, “never invest more than 1% of the money you can afford to lose to trading.”

Hence, if you can afford to lose $500 or $1,000 or whatever it may be, I never recommend putting that much money into your account. Just keep it at the bare minimum of what you need to make one individual trade, if possible. If you don’t start out very well and deplete the smaller amount of funds you deposited, you can always re-deposit and not necessarily call it “wiping out your account” since you were simply going with whatever you needed to trade with. “Wiping out an account” usually connotes poor, emotional trading decisions that you led you to lose an amount that you probably shouldn’t have or couldn’t afford to lose.

So just keep it small and don’t put yourself in a situation where you set yourself up for the possibility of losing money that you really can’t afford to lose in the event the very worst-case scenario happens and you’re locked out of your money.

If you ever have your own questions about anything, please don’t hesitate to contact me by making a comment below this article or through a personal message on the site.

Don’t Cheat Your Retirement With the 4% Withdrawal Rule
Follow 5 New Rules Instead

By Dana Anspach, CFP® and RMA®, Founder and CEO of Sensible Money

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Many retirees rely on a common rule of thumb for retirement withdrawals known as the 4% rule. According to this rule, if you withdraw 4% of your portfolio each year and increase your withdrawals with the rate of inflation, you should have enough income to last your lifetime.

So what’s the problem? While the rule can provide a rough estimate for planning purposes early on, its embedded assumptions can actually work against you once you retire.

Here’s a brief look at some of the factors the 4% rule doesn’t account for, plus steps you can take to be sure you’re on track to retire comfortably.

Or, download the full “Don’t Cheat Yourself” report by Sensible Money.

New Rule #1: Estimate the Tax Bite

Taxes are inevitable, even when you retire and may no longer have earned income. The 4% rule, however, does not account for them.

Your taxes will vary depending on whether you’re drawing income from taxable brokerage accounts, retirement accounts like 401(k)s and IRAs, or Social Security. For example, interest, dividends, and capital gains from a taxable brokerage account are taxed at preferential rates, while withdrawals from traditional IRA and 401(k) retirement accounts are taxed at regular income tax rates. Social Security income is runs through its own special formula that determines how much of it is taxed.

Thus, you can’t afford to ignore the sources of your retirement withdrawals because that will impact how much you pay in taxes. And that directly affects how much income you actually have to spend each year.

Consider two hypothetical retirees: Dora has $1 million in a taxable brokerage account while Doug has $1 million in retirement accounts.

Let’s say they are both unmarried and both expect $30,000 per year from Social Security. In addition, each will withdraw $40,000, or 4%, each year from their accounts. At first glance, it appears they’ll each have about $70,000 a year.

But consider how taxes affect their outcomes: Dora’s taxable income is $34,600, and she will pay only $300 in federal tax, leaving her with $69,700 each year.

Meanwhile, Doug’s taxable income is $48,650, and he’ll pay $6,665 in federal tax, leaving him with $63,335—roughly $6,000 less than Dora.

Ultimately, following the 4% rule may not give Doug the cash flow he needs. (Note: Depending on where each retiree lives, they may have to pay more in state or local income taxes.)

What to do instead: Prepare for the impact taxes will have on your retirement by understanding how your various sources of retirement income are taxed. Then run scenarios that show you how much your taxes will be as you draw on different accounts in retirement. This way you’ll have a clear idea of how much you will actually need to withdraw to meet your income needs, and understand which accounts to draw down first to maximize tax efficiency.

New Rule #2: Don’t Overestimate Inflation

The 4% rule builds in an inflation adjustment each year. That’s appropriate because retirees do need to account for rising prices. But there are two reasons they may need to factor in a lower rate than the general inflation rate.

Research by David Blanchett, head of retirement research at Morningstar, shows that spending is at its highest during the early years of retirement. Spending actually decreases in the middle years, and then increases again in later years, primarily due to health care needs.

Blanchett also found that inflation has the biggest impact on low-spending households—those spending less than $50,000 per year. This makes sense, as the rising prices of good and services represents a greater portion of those households’ income.

For households spending $100,000 or more in retirement, inflation has less of an impact. That means, their income may not need to go up at the same rate as inflation.

Example: Let’s say a high income couple starts taking $40,000 a year, and increases it at a general inflation rate of 3% annually. In 20 years, that couple is withdrawing just over $70,000 a year. But if the same couple starts taking $46,000 a year and increases it by 2% a year, in twenty years, they’re taking out $67,000 a year.

Both scenarios have planned for inflation. But in the later situation, you have more to spend during what Blanchett calls the high-spending “go-go years.”

What to do instead: Structure your withdrawals and inflation adjustments to match natural spending patterns and income levels.

Get expert help creating an income plan – customized for your unique financial situation.

New Rule #3: Create a Contingency Plan

The 4% rule works to ensure you won’t run out of money, even during the worst market downturns. It does so by assuming that every year could be a bad year, essentially keeping you in a state of perpetual austerity.

However, it’s highly unlikely every year will be a bad year. And that means you may be able to withdraw more money in some years than others.

What should you do instead? Try to strike a balance by creating contingency plans that keep you from overdrawing when your portfolio is weak. Here are a few ideas:

  • You could reduce or increase your withdrawal rates depending on predetermined conditions such as the size of your portfolio relative to how much you’re withdrawing.
  • You may decide you can withdraw a certain amount of money as long as your portfolio stays above a given threshold, and lower your withdrawals if your portfolio falls below it.
  • You may choose to use a dynamic withdrawal rate. For example, in any year that your portfolio experiences negative returns you could skip your inflation increase.

Finally, you may also consider contingency plans that involve changes in lifestyle, such as planning to downsize your home to free up equity in your later retirement.

New Rule #4: Time Social Security Right

Withdrawals from savings and investments are covered by the 4% rule, but the rule fails to consider other sources of income such as Social Security, pensions or annuities.

How and when you draw on this income can have a big impact on your total retirement income. For example, waiting until age 70 to take Social Security benefits increases the amount of your monthly benefit. If you take your Social Security benefit at full retirement age, you’ll get 100% of your monthly benefit. But if you wait until age 70, you’ll get an additional 8% per year, plus whatever inflation adjustment was applied to benefits each year.

Consider Doug’s situation: If he begins taking benefits at his full retirement age (Doug’s FRA is 66, but for others it can range from 66 to 67 depending on the year you were born), he’ll receive about $2500 a month. But if he waits until age 70, he’ll get about $3,570 per month (an extra 8% per year for waiting, plus a possible 2% inflation adjustment each year). Many people who devise their own spreadsheet calculations do not factor in the potential inflation adjustment, and thus aren’t using accurate numbers in their calculations.

But it’s not as simple as just waiting until you turn 70! There are many other factors you should consider as well. Those include your health and life expectancy and whether you can reasonably make larger withdrawals from other accounts while you wait. You’ll also need to assess the impact of taxes on your benefits and consider how much guaranteed income you will have access to during your later years.

See how easy it is to calculate the present value of all the dollars you will receive during retirement. Download the full “Don’t Cheat Yourself” report to learn more.

New Rule #5: Create a Customized Plan

You’ve now learned how a simplified rule of thumb, like the 4% rule, does not accurately account for taxes or inflation. You’ve also learned that it may force you to spend less than you really need to at the beginning of your retirement. And, you’ve learned that it does not easily allow you to factor in other sources of income, like Social Security.

If following a rule of thumb isn’t the best course of action, what should you do instead?

What you need to do is build a customized retirement income plan. The plan should be a robust financial model that projects your income, expenses, account balances, and taxes – using your numbers – not generalized assumptions.

Building a personal financial model also allows you to project your lifetime withdrawals and tally them up. You then compare them to what you have saved now to get a “fundedness” ratio. You can use this ratio to compare different plans and objectively see which one puts you in the best position for a long-lasting retirement.

Don’t short-change your retirement. Learn how to squeeze every penny out of your savings by downloading the full “Don’t Cheat Yourself” report today.

You can also read the first chapter of Dana Anspach’s book, Control Your Retirement Destiny. And listen to this podcast.

This content was provided by Sensible Money. Kiplinger is not affiliated with and does not endorse the company or products mentioned above.

What Are the Withdrawal Limits for Savings Accounts?

The limit is six “convenient” withdrawals per month.

If you have a savings account, you can’t make more than six “convenient” withdrawals per month. If you occasionally exceed that limit, your bank may decline your excess transactions or charge you a fee. If you exceed that limit often, your bank will convert your savings account to a checking account or close the account altogether.

This six-per-month limit applies to these types of savings account transactions:

  • Overdraft transfers
  • Electronic funds transfers (EFTs)
  • Automated clearing house (ACH) transfers
  • Transfers or wire transfers made by phone, fax, computer, or mobile device
  • Checks written to a third party
  • Debit card transactions

Key Takeaways

  • Consumers can make six normal withdrawals per month from their savings accounts.
  • Some less common withdrawal types, such as visiting a teller in person, don’t count toward the limit.
  • The primary reason for the limit is that banks only hold a small percentage of consumers’ deposited funds in reserve.
  • The federal government insures the money you deposit in your bank up to $250,000 per depositor.

Why Is There a Limit?

The money in your savings account is yours, so why can’t you access it as often as you want? Because a federal law called Regulation D doesn’t allow it.

Banks operate under what’s called a fractional reserve system. When you deposit any amount of money in your bank account, the bank uses most of that money for other things, such as consumer loans, credit lines, and home mortgages. The bank holds only a small fraction of its customers’ deposits. This is how banks make money and how consumers are able to borrow.

Distinguishing among different types of accounts helps banks keep enough reserves. Checking accounts are designed to handle many transactions. Money is constantly flowing into and out of them. As a result, it’s difficult for a bank to rely on customer checking account balances to meet the federal government’s reserve requirements. In fact, the government doesn’t even require banks to keep reserves on checking account balances.

Convenient vs. Inconvenient Transactions

Savings accounts are designed to receive deposits, so customers can make as many deposits to their savings accounts each month as they want. But savings accounts aren’t meant for frequent withdrawals, only occasional ones. Money transfers you make online, by phone, through bill pay, or by writing a check are considered convenient, and the law limits those. That’s why it’s a good idea to pay your bills from your checking account, not your savings account.

You might use your savings account to pay large, irregular bills, such as insurance or property taxes, and that’s fine. You are entitled to those six withdrawals per month. In fact, you can actually exceed that limit if you withdraw money in a few ways:

  • By visiting a teller in person
  • By withdrawing cash from an ATM
  • By transferring money from savings to checking at an ATM
  • By asking your bank to send you a check

Since these methods are considered inconvenient, they don’t count toward the six-withdrawal limit. All the same, banks may still charge you for more than six withdrawals or transfers from savings per month even if some of the withdrawals use an inconvenient method.

The six-limit rule applies to transactions such as overdraft and bill-pay transfers and debit card transactions, but not to “inconvenient” transfers done in person at your bank or at an ATM.

Don’t Fear Fractional Reserves

Does it make you nervous that your bank doesn’t really keep most of the money you deposit on hand? It shouldn’t. The Federal Deposit Insurance Corporation (FDIC) protects the money you put in your bank. Up to $250,000 per depositor—per institution—is covered. If your bank should become insolvent, FDIC insurance means you won’t lose your money. If banks did have to keep 100% of customers’ deposits on hand, it would be harder for you to get a loan to buy a car, buy a home, or start a business.

Besides using a checking account for most of your transactions, there are a couple of other ways to avoid running up against Regulation D’s limits. If you expect to use your savings to make more than six transfers or payments in a given month, make one larger transfer from your savings to your checking account and then conduct your transactions out of your checking account. If you’re already at the limit, you can move more money out of savings using the methods mentioned earlier.

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