This case demonstrates the additional longevity that is possible by carefully managing the location and timing of asset withdrawal. By withdrawing funds in a tax efficient manner, they were able to extend the portfolio’s longevity by more than seven(7) years
Financial Facts:
$1,000,000 in 401(k)s
$500,000 in regular taxable accounts
Mike & Jen, Age 62 with $1,500,000 of assets
This couple began retirement in January 2010. They are wondering how long their financial portfolio may last if they spend $107,800 after taxes in 2010 and an inflation-adjusted equivalent amount each year thereafter while both spouses are alive, but 75% of that amount after the death of the first spouse.
This couple is a fictional representation of actual retirees.
The numbers involved in this case study are real.
Options Compared
Option 1: What if they withdraw funds from 401(k)s first and then the taxable accounts.
Option 2: What if they withdraw funds in a tax-efficient manner from their financial portfolio. Each year, they will withdraw funds tax efficiently from his 401(k)s and taxable accounts in a fashion that is designed to increase the longevity of her portfolio, and they use a partial Roth conversion when appropriate.
With Strategy 1, the graph demonstrates that the portfolio runs out of money at the end of 2039.
In Strategy 2, the portfolio runs out of money in 2047; the portfolio provides about $78,000 of spending in 2047 and Social Security benefits provide additional funds.
By withdrawing funds in a tax efficient manner, they were able to extend the portfolio’s longevity by more than seven(7) years.
They maintain a 50% stocks-50% bonds after-tax asset allocation with stocks earning 9% per year including 2% dividend yield and bonds earning 3% interest per year. For the stocks, 20% of capital gains are realized each year with all gains being long term. The original cost basis of assets held in the taxable account is set at the market value. His Primary Insurance Amount for Social Security is $2,500 a month and hers is $1,500 a month. They both have Full Retirement Ages of 66, begin Social Security benefits at 66, and receive their Primary Insurance Amounts. We assume one partner dies in 16 years at age 78 and the survivor lives on 75% of the real amount they lived on when both were alive. Both Strategies locate stocks and bonds in the accounts (i.e., taxable account and 401(k)s) in a tax-efficient manner, while maintaining the 50% stocks-50% bonds after-tax asset allocation. We can help clients with this asset-location decision, which may further extend the portfolio’s longevity. Based on today’s Tax Code, they will usually be in the 25% tax bracket in retirement. They take the standard deduction each year. Inflation is 3% per year with all tax brackets, standard deduction, over 65 tax exemption, and personal exemption amount rising with inflation.
