For years, you’ve worked hard and saved diligently for retirement. But, if you’re still worried about running out of money in retirement, you’re in good company. Outliving their nest egg is the top fear of many new and seasoned retirees.
One of the most effective ways to alleviate that fear is by building a cohesive and disciplined retirement income, spending, and withdrawal plan.
At Goepper Burkhardt, we specialize in helping those nearing retirement do just that. Here’s what we tell our clients about creating a solid withdrawal strategy as they near retirement.
What’s A Withdrawal Strategy?
You and your advisor use a retirement withdrawal strategy to determine how much money you should take out of each account and when. Withdrawal strategies are highly customizable, but the general rule of thumb is to make your withdrawal decisions based on the account’s tax status.
At Goepper Burkhardt, we believe the optimal strategy is to work from the least tax-efficient to the most tax-efficient (taxable, tax-deferred, tax-free). Of course, your retirement needs aren’t black and white, and you’ll need to work with your advisor to develop the right plan for you.
Everyone’s strategy will look a little different. Yours should be shaped by resources, account types, spending needs, tax obligations, and more. Working with your advisor, you can use important tax-focused strategies to round out your tax buckets. These could include Roth conversions, charitable giving, gifting to loved ones, etc.
First, Know What You Have
Retirement income planning feels ambiguous at first. You’re facing tough questions like,
- How much do I have?
- Where is my money saved?
- What’s the best way to use my savings?
We like to start off simple by helping you understand what you have in fixed income, variable income, and additional assets:
Fixed income: Social Security, pension plan, cash, certificates of deposits (CDs), bonds
Variable income: Brokerage accounts, 401(k), IRA
Additional assets: Real estate, art collections, rare commodities
Then, Determine How Much You Need
Once we identify your assets, we’ll focus on determining how much you want to spend in retirement. (Hint: It’s probably more than you think).
There are different ways to do this, but looking at your current spending is the easiest way to get a ballpark figure. Review credit card bills and bank statements over the last 12 months to get a realistic idea of how much you need to maintain your current lifestyle.
Once we get a rough number, we’ll multiply that by your estimated time in retirement – this could be 15, 20, or 30+ years depending on your expected retirement date.
Understanding how much you have saved up and how much you need to live comfortably will help us determine a spending rate that suits you.
Breaking Down The Tax Buckets
Having a mix of retirement income types gives you more flexibility and choices. As we mentioned above, there are typically three retirement income buckets based on tax status: taxable, tax-deferred, and tax-free.
Any income you take from a brokerage account will be subject to tax. If you’ve held onto the assets in the account for less than a year and make a profit on the sale, you’re subject to paying short-term capital gains tax.
If the assets have been held for longer than a year, distributions are subject to long-term capital gains tax. Typically, long-term capital gains are taxed at a lower rate than short-term.
The most common types of tax-deferred income are withdrawals made from 401(k) or traditional IRA accounts. Because the money you contributed to these accounts was pre-tax, it lowered your taxable income for the year the contributions were made. That also means you are responsible for paying ordinary income tax on any distributions made in retirement.
Retirement accounts funded with after-tax dollars include Roth 401(k)s and Roth IRAs. Because you fund these accounts with after-tax dollars, any qualifying distributions in retirement are tax-free.
Meet Becky and Gerald Williams, age 62 and 65, respectively. They recently transitioned to retirement and are excited to work with an advisor to develop a sound withdrawal strategy tailored to them and their spending habits.
Neither Becky nor Gerald are worrying about withdrawing from their tax-deferred 401(k) yet since RMDs don’t kick in until age 72. They’ve also opted to wait until age 70 to collect Social Security so they can receive the maximum benefit.
The Williams have a combined income of around $200,000, putting them in the 24% tax bracket. They’re realizing significant gains this year, as they sold their primary residence before retiring.
What makes the most sense for them?
For starters, they’d likely benefit from pulling funds out of their taxable accounts (like a brokerage account) for the rest of the year.
Then, they could look at a Roth conversion—converting their traditional IRA into a Roth IRA. That way, they ultimately reduce their required minimum distributions (RMDs) and potentially lessen the impact of Medicare IRMAA penalties (these occur if your income exceeds certain limits.
As their circumstances shift and their income needs vary, their team will work closely with the Williams to adjust their withdrawal strategy to accommodate these changes.
Why Do You Need a Withdrawal Strategy?
At its core, a withdrawal strategy is an effective way to increase the longevity of your retirement assets. It’s important for making tax-efficient decisions in retirement, helping you put more of your money toward doing what you want.