How to get the most from your nest egg

By Ginger Applegarth

Financial planners have created an entire industry around devising strategies to maximize their clients' retirement distributions. It's complicated and even a minor mistake can cost you hundreds or even thousands of dollars. And here's the really bad news: There is no clear-cut best option for receiving your retirement distributions.

Nonetheless, we're going to offer a strategy that probably makes sense for the largest group of people. If you're like most people, you're probably counting on your 401(k) or your company's pension plan, your IRA and Social Security (at least for now). How does it all add up, and have you figured out which monies you're going to tap into first?

Here's the basic concept:

You should withdraw first those funds that will have the smallest tax bite. That's because your income -- in real dollars -- probably will decline as you age. Here's a strategy that puts as much as possible into your pocket, while keeping the government's take at a minimum.

First, look at the steps you should take early on:

Determine if you're going to need money from your Roth IRA or if you can leave it untouched. This makes a huge difference in your strategy. If you have a Roth IRA, that money has been put in with after-tax dollars: You either contributed those after-tax funds on an annual basis, or you converted your traditional IRA to a Roth and paid the income taxes at the time of conversion. Under the new law, that money grows tax-free, and you can take it out whenever you want without tax consequences. In fact, there is no legal requirement that you have to take it out at all. If you prefer, you can leave it for your children. So if you don't think you'll need the income, just leave it alone (assuming you want to leave money to your heirs).

Use up your non-retirement money (like your after-tax investments) next. You bought those investments with after-tax dollars so you have a cost basis, and you pay on a capital-gains tax. The taxes on liquidating those assets are much less than taking money out of your retirement plans.

Many experts now recommend that you take Social Security as soon as possible, even though your monthly benefits will be less. This is because the government subsidizes it, and if you don't need it, you can always invest it. You could also make a case that -- depending on your longevity and the future value of money -- that you can come out ahead by taking the money as soon as possible. Besides, who knows what the future holds for people who enter the Social Security system in the future?

Now it's time to turn to your retirement plans. You want to delay using these funds because:

• The distributions have higher taxes than if you sell your non-retirement funds.

• Once you take your money out of a tax-sheltered plan, you can't put it back.

The trick here is not to wait too long, since the government says you have to begin withdrawing these funds by April 1 in the year after you turn 70 1/2. The only exception is that if you keep working, you can defer taking money out of the plans until you actually retire.

If you have a defined benefit plan that pays you an annuity (which is a set amount each month), you'll get a variety of payment options. You can get single life only (when you die, the checks stop), joint and survivor payment (the payout is less than with single life, but your spouse continues to receive a monthly benefit until her or his death), or spread over a 10-year period. (If you die within 10 years, your beneficiary will continue to receive payouts for the remainder of the 10 years.) Here it becomes a ticklish issue of health. If you and your spouse are not healthy, you shouldn't choose joint and survivor, which is calculated on the assumption you will live into your 80s. In that case, a 10-year certain option might make sense.

If you have a 401(k) plan or defined contribution plan, you can either roll over the money into an IRA or choose an annuity plan that pays you a monthly income. I recommend you roll the money into an IRA if you feel comfortable managing your own funds or if you can find yourself a good money manager to handle the investments for you. This strategy is based on looking for the long term. If you work for a nonprofit organization, you probably participate in a 403(b) plan that is like a 401(k) plan. The guidelines here are similar.

If you take money out of a retirement plan before the law allows you to, you have the great pleasure of paying ordinary income taxes on that amount plus the 10% penalty. The laws change if you "retire" under certain circumstances. If you quit, get fired or laid off, you can access the money at age 55, even if you go to work somewhere else. The same is true if you become disabled.

Tap into your regular IRA next. As with a 401(k), you can start taking distributions from your IRA at age 59 1/2 without penalty. You have to pay income taxes on the money you withdraw and the money is taxed at your ordinary income tax rate. You must start taking distributions by April 1 after the year you turn 70 1/2.

If you don't have any annuities as part of your retirement plan, you can always buy them. Many don't have commissions these days and their expenses are very low so you can avoid the middleman. It's always a good idea to have a portion of your income that will last as long as you live, even if you make it well into your 90s.

Remember that when you retire, you probably have 20 or 30 more years to live, so you need to take a long-term investment strategy and take risk in the stock market. Don't bury yourself and your money in the sand by sticking all of your funds into fixed-income investments that offer returns barely above the inflation rate. Yes, you should take a more conservative approach, but do it gradually, not all at once. Go ahead, live a little.

Ginger Applegarth has written three books including Wake Up and Smell the Money, published by Viking. She is a former contributing correspondent for CNBC's The Money Club and NBC's The Today Show and is a former contributing editor for Worth magazine. Her Web site, ApplegarthAdvice.com, offers a daily financial newsletter, commentary, tips and articles. She lives in the Boston area.