Retirement Income Strategies for the 1%

It's a good problem to have, but the nation's wealthiest folks have a few extra challenges to address when making decisions about their withdrawal plan in retirement.

(Image credit: gradyreese)

While the 1% is a loosely defined, income-determined social class, we often assume that its members have so much money that they don’t need to plan for retirement. This is typically not the case. For those with roughly $2 million+, careful planning is still necessary, whether it be for income or legacy purposes. Here are some income strategies for the affluent that may run counter to common retirement income wisdom.

Amass a Big Cash Cushion

First, start to stockpile cash in the years leading to retirement, especially in a market environment like today’s, which has featured a long upward trend. This does not mean you should liquidate investments. It means you should start spending less and saving more. If you start to save large sums of money, it will help you be prepared to deal with sequence risk. That means, you will be able to ride out a downturn in the market in your early retirement years, allowing your investments the opportunity to rebound before you have to liquidate them.

In addition, living off cash in retirement will also keep your income tax bracket a bit lower, which may make Roth IRA conversions more attractive.

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Lastly, stockpiling cash will help you adjust to a lower-cost lifestyle in retirement, something even the wealthy should strive to achieve. If you’re currently earning $1 million a year and want to re-create that same amount in retirement, using a 4% withdrawal rate, you’d need a nest egg of $25 million. That’s not feasible for most folks. So, if you start saving substantial amounts in the years leading up to retirement, your spending should decrease accordingly. That’s never a bad move as you enter your retirement years.

Consider Doing a Roth Conversion

Roth conversions have become an extremely popular topic of conversation since 2010, when the government eliminated the income thresholds. Today, regardless of your income, you can move money from a pretax bucket to an after-tax bucket, which makes qualified distributions tax-free down the road. However, you must pay the tax on the conversion amount in that year. While folks love talking about it, very few are willing to pull the trigger and write the check that comes with it.

Here’s where it makes sense: If you are more focused on your legacy than on income in retirement, Roth IRAs are a wonderful way to leave assets, because they pass income tax-free. If you have years in which your tax bracket drops significantly, the conversion cost is lower. If you are worried about tax rates going up in the future and would rather pay at today’s rate, converting may make sense.

Doing one, lump-sum conversion is typically a bad idea as it will cause your income tax rate to spike. Instead, consider partial Roth conversions over several years.

Determine Whether Waiting to Take Social Security Makes Sense

Conventional wisdom says that if we don’t need Social Security, we shouldn’t take it until 70. While delaying Social Security comes with significant rewards in the form of 8% annual income increases between full retirement age and age 70, it is important to factor in your beneficiaries’ goals, life expectancies and tax situations into the equation.

Depending on how long someone lives, 70 may be the best age to claim benefits for income purposes. That said, it may make sense for a couple to have the lower earner collect early (at age 62, if not working) and the higher earner to delay until 70. Click here for more details.

Remember: If you claim Social Security early, it will allow you to defer distributions from other investments. You can’t pass along Social Security benefits to the next generation, but you can pass assets.

Deal with the Perks of Corporate Stock Compensation

Many of those in the 1% got there because of executive stock plans. Such plans take a variety of forms, including options, grants and employee stock purchase plans. Whatever the case, these plans often lead to concentrated positions in your employer’s or former employer’s stock. If this money is in a retirement account, it makes sense to look at net unrealized appreciation (NUA) when reviewing your distribution options.

NUA tax treatment essentially allows you to move pretax dollars into an after-tax account by recognizing the difference between your cost basis and the current value of the stock. This election must be made prior to rolling money over into an IRA, and once you’ve made the decision, it’s irrevocable. So make sure you understand your options. There are calculators online, such as one by ETrade, that can help show the impact of NUA election

Be Smart about Your Asset Location

You’d be shocked at the number of advisors who put tax-inefficient investments in taxable accounts. They may be high-turnover mutual funds, hedge funds or REITs. While I consider this a rookie mistake, many financial professionals are set in their ways and view these funds as the best, or only, way to invest. As an investor in a mutual fund, you are responsible for the gains realized when the manager buys and sells investments. In certain funds, this happens a lot! That income will show up at tax time on your 1099. These gains could be taxed at the highest capital gains rate (23.8%, which is the 20% capital gains rate plus an additional 3.8% tax on high-income taxpayers) or the highest income tax rate (39.6%), depending on the tax treatment.

Exchange traded funds, indexed mutual funds and single stock positions have lower turnover as they are usually unmanaged. Therefore, they are more tax-friendly. Morningstar allows you to get a sense of how much you are losing to taxes in any mutual fund you own. Warning: This number may shock you.

See If It’s Time for a Trust

If you’re above the estate tax exemption ($5.49 million per person in 2017), enter the world of irrevocable trusts. Often the goal here is to remove assets from your taxable estate in order to avoid the federal estate tax. Those who are wealthy and charitably minded may want to consider charitable remainder trusts, which designate a set amount (either percentage or dollar) as annual income for you, with the remaining principal passing at death to a charity. These structures are complex and become even more challenging in a low-interest-rate environment. If you want to go down this path, consult with a CPA, estate attorney and CERTIFIED FINANCIAL PLANNER™.

You’ve worked hard to put yourself in a comfortable financial position, but that doesn’t excuse you from doing some planning. A significant market correction or long-term care event can still create quite a ripple. As you evaluate your advisers, make sure they have experience working with people like you. The planning is totally different in your world, and following rules of thumb may leave you with no pot of gold at the end of the rainbow.

Securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through Campbell Wealth Management, a registered investment advisor and separate entity from LPL Financial.

Content is for general information only and not intended to provide specific advice or recommendations for any individual. Investing in mutual funds and ETFs involves risk, including possible loss of principal. Campbell Wealth Management and LPL Financial do not provide legal or tax services.

Traditional IRA account owners should consider the tax ramifications, age and income restrictions in regards to executing a conversion from a traditional IRA to a Roth IRA. Roth IRA withdrawals prior to age 59½ or prior to the account being opened for five years, whichever is later, may result in a 10% IRS penalty tax. Tax laws are subject to change.


This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

Evan T. Beach, CFP®, AWMA®
President, Exit 59 Advisory

After graduating from the University of Delaware and Georgetown University, I pursued a career in financial planning. At age 26, I earned my CERTIFIED FINANCIAL PLANNER™ certification.  I also hold the IRS Enrolled Agent license, which allows for a unique approach to planning that can be beneficial to retirees and those selling their businesses, who are eager to minimize lifetime taxes and maximize income.