On today’s episode of the Wiser Roundtable Podcast, the team analyzes the variables that determine an individual’s withdrawal strategy for retirement. They answer some commonly asked questions such as: when you should begin collecting social security and from which account(s) you should withdrawal funds.
Listen on Apple Podcasts or watch on YouTube:
Timeline for Retirees
There’s a lot of confusion surrounding withdrawal strategies. Without adequate preparation and guidance, making the transition from your working years to retirement can be challenging. In retirement, income often stems from different sources such as IRAs, brokerage accounts, social security, and pensions. Extended lifespan and inflation also need to be considered when crafting your withdrawal strategy.
Though inflation has been rather tame for the last 15-20 years, the Rule of 72 tells us that within the timespan of any given retiree, at an estimate of 2.25% annually, the cost of living is expected to double. Traditionally, retirees will spend more at the beginning of retirement, less in the middle, and more towards the end (due to increased healthcare needs). It’s important to note, that in the case of social security – it may not always be in your best interest to start taking social security the moment you retire. Deferment through full retirement age will result in an 8% increase.
Tax-Smart Withdrawal Strategies
Determining how to manage a stream of income to minimize current and future taxes is an essential part of determining a successful withdrawal strategy. Different sources of income have different taxation structures. The higher the earnings or reported income, the higher the tax rate, so knowing which type of account to open and when to withdraw from that account can be tricky. It’s also important to note that social security has its own tax structure. Retirement accounts such as contributory IRAs and rollover IRAs are taxable with any withdrawal, whereas Roth IRAs are tax free and can remain that way throughout an individual’s entire lifetime.
To illustrate these concepts, we take a look at a hypothetical scenario where a husband and wife, both 65 years old that are newly retired. They are looking to live on approximately $120,000 a year and need guidance on where to withdraw this amount from. Combined IRAs total $1.5 million, $50k in each Roth IRA and $250k in a brokerage account. They are debt-free and have paid off their home. Should they choose to delay social security, they will receive an 8% increase. Looking at this scenario, a standard withdrawal strategy would be to first pull money from the brokerage account. Next, you would pull from the Roth IRA as it’s tax free, and finally, from the traditional IRA. This assumes there are no special circumstances. Of course, the $120,000 need must increase annually at 2.25% to account for inflation, but overall, this is considered to be a tax-smart withdrawal strategy.
Each Situation Is Unique
Another scenario: should tax rates increase moving forward, it may be wise to defer money for the future tax-free while simultaneously taking care of estate planning. Tax code is progressive, so in retirement, there is more flexibility when it comes to converting IRAs to Roth IRAs to minimize taxes. Roth IRAs can grow tax free throughout retirement. While these examples help to illustrate a general strategy, it is important to remember that each situation is unique. Looking at the big picture while also taking the time to consider the individual variables and options available to you, allows you to define your goals then implement a plan of action.
1:00 Timeline for Retirees
8:15 Tax-Smart Withdrawal Strategies
16:09 Each Situation is Unique
Learn more about Brad Lyons.
Learn more about Matthews Barnett.