Retirement Income Planning Isn’t Just About How Much You've Saved
Most people spend decades focused on saving for retirement, carefully contributing to 401(k)s, IRAs and other investment accounts. Once retirement arrives, there’s a new challenge, deciding how to turn your savings into income. Surprisingly, one of the most important retirement planning decisions isn't how much you've accumulated, but rather which accounts you withdraw from and when. The order in which you draw down your assets can have a significant impact on your long-term financial success.
A common rule is to spend taxable accounts first, then move to tax-deferred accounts such as traditional IRAs and 401(k)s, while saving Roth assets for last. While this approach may work well in some situations, it shouldn't be followed blindly. Relying too heavily on tax-deferred accounts early in retirement can increase your taxable income, potentially pushing you into a higher tax bracket than necessary. It may also reduce opportunities for strategic Roth conversions during years when your income is lower.
For many retirees, a more effective approach is to use a strategic blend of account types. Instead of emptying one account category before moving to the next, coordinate withdrawals across taxable, tax-deferred and Roth accounts each year. This strategy allows retirees to better manage their taxable income and take advantage of lower tax brackets. In some years, drawing from Roth assets can help avoid additional taxable income, while in other years it may make sense to take more from traditional retirement accounts when tax rates are relatively low. Over time, this type of tax-efficient withdrawal strategy can help reduce the total taxes paid throughout retirement.
The impact of withdrawal decisions extends beyond income taxes. Withdrawal sequencing can also affect Medicare premiums through Income-Related Monthly Adjustment Amounts (IRMAA), influence how much of your Social Security benefits are taxable and affect the amount ultimately passed on to heirs. Because these factors are interconnected, even small adjustments to a retirement income plan can have meaningful long-term consequences.
Perhaps the biggest misconception is that a withdrawal strategy is a one-time decision. Retirement is constantly changing. Income sources shift, account balances fluctuate and tax laws evolve over time. A withdrawal plan that makes perfect sense at age 65 may be far less effective at age 72. That's why it's important to review your withdrawal strategy annually and make adjustments as circumstances change.
If you're approaching retirement or already retired, don't just ask, "How much can I withdraw?" Ask, "Which account should I withdraw from, and why?" Thoughtful planning around that question could be one of the most effective ways to help keep more of the money you've worked so hard to save.
If you would like to learn more about retirement withdrawal strategies watch our comprehensive retirement planning webinar. This easy to access, on-demand, no-cost, no-obligation webinar can help you identify the next steps you need to take to prepare for your retirement. Please click the link below to register to review this insightful, on-demand financial education event.
As you plan for retirement, remember this simple truth: it's not just what you save, it's what you keep. A thoughtful withdrawal strategy can help reduce taxes, manage healthcare costs, and make your retirement savings last longer. After all, successful retirement planning isn't just about building wealth, it's about spending it wisely. Plan well. Live well. Retire well.
Will Riggs, NSSA
Financial Advisor
Plan well. Live Well. Retire Well.
This content is for informational purposes only and is not investment, legal or tax advice. Investing involves risk, including loss of principal and past performance does not guarantee future results. Strategic Wealth Partners is an SEC-registered investment adviser; registration does not imply a certain level of skill or training. Any guarantees discussed are backed solely by the issuing insurance company. For more information, including our Form ADV, please visit adviserinfo.sec.gov.
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