Withdrawal Strategy

What is it?
Withdrawal sequence is about how you should “tap” your retirement savings. It is identifying the proper order, appropriate account, specific holding and the right amount to liquidate from the assets you hold in your 401k, Traditional IRA, Roth, Annuity, CD’s etc…. There may be significant advantages to tapping more than one account at a time.

Why does it matter?
Not all retirement savings accounts are treated the same from a tax perspective. They may be “tax exempt”, “ tax deferred” or “taxable”. Your taxes will be impacted in different amounts based on how much and when you drawdown from these different accounts. You may benefit from tapping multiple accounts and specific holdings in those accounts.

How do people get it wrong?
Unfortunately, some people will draw from whichever account, whenever they want and ignore the implications – we call it the “Willy Nilly” strategy. Others may rely on a financial advisor who defaults to “conventional wisdom” which suggests you should tap and fully liquidate in this order: 1. Taxable 2. Tax Deferred 3. Tax Exempt. Sadly, this will expose the retiree to significant and unnecessary tax exposure. You can do better.

What is it?
Coordination is a more holistic approach to generating an income stream in retirement. It is about the interplay between your Social Security benefits and your retirement assets and Medicare. Rather than thinking about each independently, a retiree can develop a strategy that maximizes the benefits in a tax-advantaged manner.

Why does it matter?
It is easy to “torpedo” your Social Security benefits or increase your Medicare premiums when drawing down income. If you only focus on the investments you liquidate, your withdrawal could the increase the amount of taxes or higher premiums you pay. Properly coordinating your withdrawals will ensure you are minimizing the amount you will pay in retirement. The less you payout, the longer your retirement assets will last.

How do people get it wrong?
Most individuals, and many financial advisors do not fully consider the implications of a weaker strategy that independently considers the retiree’s savings, social security benefits, and Medicare premiums.

What is it?
Life is dynamic. Your situation is constantly changing and your strategy should as well. Dynamic updates is the opposite of the more common “set it and forget it” planning approach. It is about considering the many changes in your situation throughout retirement and making sure your strategy stays up to date. Our software does the work for you by helping you monitor your situation, and then telling you what actions you should take to get back on track.

Why does it matter?
Retirement can last many years and it is unlikely the original plans will be relevant much past the first year of retirement. You have to be flexible and your assumptions may need to be altered. Overlooking a critical change in your situation will bring additional risk of getting off track and possibly running out of money in your lifetime. Being attentive, and in some cases taking action, based on critical changes in the market, the mix and value of your investments, and your income needs is critical to a successful withdrawal strategy.

How do people get it wrong?
Few people actually construct a plan for income in retirement. Those that do one themselves, or create a plan with the help of an advisor may believe it is a one-time effort. In reality, you must continually revisit your assumptions, update your profile and re-evaluate your income strategy.

What is it?
If you have a Traditional IRA, you can convert part or all of the account to a Roth IRA. You pay taxes as if you withdrew the entire amount converted, but without any penalty for early withdrawal; in return, the money will grow tax-free in the Roth IRA, and you will not pay any tax on that withdrawal if you meet the Roth IRA distribution rules.

Why does it matter?
The benefit of a Roth conversion depends on your current tax bracket as well as your expected tax bracket. If your current tax bracket is lower than it will be in the future, it may make sense to do the conversion now. Paying less taxes means you get to keep more of your money.

How do people get it wrong?
Retirees may not realize their sources of income may increase the later years of retirement and suddenly push them into a higher tax bracket. For example, if you delay Social Security until after 70 and you have to start taking the Required Minimum Distribution (RMD) from your traditional IRA at 70.5, your income in retirement may now exceed the level of income you had in the earlier years of retirement. It would have been a missed opportunity to convert to a Roth in the years the income bracket was lower.