Check out any website that offers retirement advice, and you're likely to come across the same suggested sequence for financial distributions: First, take from any taxable accounts; then tax-deferred; then tax-exempt.
That's the typical withdrawal strategy. That's conventional wisdom.
And, in my opinion, it's wrong. Or at least, it's wrong for many people.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
For example, there’s a misconception that when you’re older, you’re going to be in a lower tax bracket than during your working years. That’s often not the case.
How the tax picture darkens for retirees
People are told to hold off taking their tax-deferred money as long as possible, but at 70, they must start taking Social Security distributions, which are taxable. You probably have a 401(k), pension or traditional IRA you must begin taking required minimum distributions from, and those are taxable. All this taxable income can increase your overall tax bracket — often making it higher than it was during your working years.
Meanwhile, by this age, many people have paid off their home mortgage. They are no longer itemizing on their tax return; they’re taking the standard deduction. Or one spouse dies and the survivor goes from filing jointly to filing single status, losing a standard deduction and a personal exemption. Again, their income could be lower than ever, but their tax bracket may actually be higher.
A holistic approach is needed
The optimum strategy is to fill your tax bracket, but not bump up to the next. So you have to project out: What will your tax bracket be for the rest or your life? Then, go back and start over, looking at different formulas and distribution sequences.
All that takes deliberate, forward planning — steering a straight path onto the retirement runway in your 60s, before you turn 70.
This holistic approach takes time and a team of planners, CPAs and estate-planning attorneys working together.
Not everyone wants to take that kind of time or do that much analysis. The aforementioned typical withdrawal strategy is popular with financial advisers, I think, because it’s easy. Many firms are working with a business model that depends on hiring salespeople. They don’t want people who plan as much as they want people who can gather assets.
Unfortunately, those good salespeople aren’t necessarily well trained, technically, and they tend to be less focused on the details. So instead of working their way through an individualized, long-range plan for a client, they come up with simplified rules and broad-based solutions that allow them to meet with as many people as possible and ultimately sell as opposed to strategize.
But retirement planning isn’t about one simple set of answers; it requires running a lot of different scenarios to identify the best possible way to reduce taxes, optimize income and reduce risk. It’s more like a Rubik’s Cube: You can solve the blue side, but you may still have a problem with the orange.
A different kind of expertise
I believe that puzzle requires a special kind of adviser: a fiduciary who focuses only on retirement planning.
This is another place where a lot of people go wrong. They think the adviser who helped them accumulate their wealth is the right one to help them distribute it. But the planning is very different.
When you’re young and accumulating wealth, you make most of your financial decisions in a vacuum or in isolation. Many have a bunch of pieces: a pension, a 401(k), IRAs, Roth IRAs, life insurance, disability insurance, long-term-care insurance, real estate, Social Security and maybe some savings or some stocks and bonds.
In retirement, you need someone who can help put those pieces of your retirement puzzle together and make them work for you. Distribution planning is all about strategically taking from the right accounts at the right time — and one strategy does not fit all. The right adviser for you will give you the best answers — not just the easiest ones — for your retirement years.
-
Don't Miss These Sub-$100 Prime Day Deals for a Smarter, Safer HomeUse these under-$100 Prime Day deals on Ring, Blink, Nest and other top smart home brands to upgrade your home for less this summer.
-
Stock Market Today: Trump's Copper Comments Cause a StirMarkets remain resilient and monetary policy makers stand fast against a rising tide of new terms of trade, including around copper.
-
Financial Fact vs Fiction: Why Your 'Magic Number' Isn't Actually MagicalDo you think you're diversified if you're invested in the S&P 500 and Nasdaq? Do you think your tax rate will fall in retirement? Think again — and read on for other myths that could be leading you astray.
-
Opportunity Zones: An Expert Guide to the Changes in the One Big Beautiful BillThe law makes opportunity zones permanent, creates enhanced tax benefits for rural investments and opens up new strategies for investors to combine community development with significant tax advantages.
-
Five Ways Retirees Can Keep Perspective Through Market JittersMarket volatility is a recurring event with historical precedents (the dot-com bubble, global financial crisis and pandemic), each followed by recovery. Here's how people who are near or in retirement can navigate economic uncertainty.
-
I'm a Financial Strategist: This Is the Investment Trap That Keeps Smart Investors on the SidelinesForget FOMO. FOGI — Fear of Getting In — is the feeling you need to learn how to manage so you don't miss out on future investment gains.
-
Can You Be a Good Parent to an Only Child When You're Also a Business Owner?Author and social psychologist Susan Newman offers advice to business-owner parents on how to raise a well-adjusted single child by avoiding overcompensation and encouraging chores.
-
How Advisers Can Steer Their Clients Through Market Volatility (and Strengthen Their Relationships)Financial advisers need to be strategic when they communicate with clients during market volatility. The goal is to not only reassure them but to also help them avoid rash decisions, deepen your relationship with them and build lasting trust.
-
The Hidden Costs of Caregiving: Crisis Goes Well Beyond Financial IssuesMany caregivers are drained emotionally as well as financially, leading to depression, burnout and depleted retirement prospects. What's to be done?
-
Cash Balance Plans: An Expert Guide to the High Earner's Secret Weapon for RetirementCash balance plans offer business owners and high-income professionals a powerful way to significantly boost retirement savings and reduce taxes.
