Why the Typical Retirement Withdrawal Strategy Is Wrong
Many people have financial situations that call for a unique approach to withdrawing retirement savings.
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.
![https://cdn.mos.cms.futurecdn.net/hwgJ7osrMtUWhk5koeVme7-200-80.png](https://cdn.mos.cms.futurecdn.net/hwgJ7osrMtUWhk5koeVme7-320-80.png)
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.
Get Kiplinger Today newsletter — free
Profit and prosper with the best of Kiplinger's advice on investing, taxes, retirement, personal finance and much more. Delivered daily. Enter your email in the box and click Sign Me Up.
Kirk Cassidy is president of Senior Planning Advisors and Strategic Investment Advisors. Cassidy is an Investment Adviser Representative and a fiduciary with a Series 65 securities license and life insurance licenses. He is a national speaker who teaches retirement planning in a university setting.
-
Stock Market Today: Dow Outperforms After IBM Earnings
Investors also parsed a strong reading on second-quarter GDP and a dismal decline in durable goods.
By Karee Venema Published
-
Try the 6 to 1 Grocery Shopping Method to Save Time and Money
The 6 to 1 Grocery Method can help you save money, reduce waste and eat healthier.
By Erin Bendig Published
-
If You're the Millionaire Next Door, You May Be a Terrible Spender
Good job on all that great saving. Now you need to start spending some of that hard-earned retirement savings on the things you love.
By Joe F. Schmitz Jr., CFP®, ChFC® Published
-
Who Will Be the Beneficiaries of Your Wealth?
Deciding who you want to inherit your wealth, as well as when and how, is a crucial first step in estate planning. Here are the four beneficiaries to keep in mind.
By Adam Frank Published
-
Confused by Annuities? Making Sense of the Different Types
Many investors aren't sure if annuities are a good option for meeting financial goals. Let's look at the different categories, along with their pros and cons.
By Kris Maksimovich, AIF®, CRPC®, CPFA®, CRC® Published
-
Talkin' 'Bout My Generational Wealth: Baby Boomers
With retirement, each generation has different priorities and challenges. For Baby Boomers, it's a matter of ready or not, here it comes.
By Alvina Lo Published
-
How to Avoid a Big Hassle if Your Financed Car Gets Wrecked
How an insurance check is made out for repairs can cause a world of problems if the lienholder is left out.
By H. Dennis Beaver, Esq. Published
-
Estate Planning Strategies to Consider as Election Nears
Are big changes in tax laws coming soon? Not likely, but you might want to take advantage of higher estate and gift tax exemptions well before the end of 2025.
By David Handler, J.D. Published
-
How to Get Your Money's Worth From Your Financial Adviser
A good financial adviser will focus on how your financial planning and investment strategy align with your lifestyle and aspirations.
By Pam Krueger Published
-
Think of Prenups and Postnups as Financial Planning Tools
These contracts provide a clear framework for asset management and protection and are especially useful if you get married later in life.
By Andrew Hatherley, CDFA®, CRPC® Published