One of the biggest mistakes retirees can make is ignoring the bite taxes can take from their hard-earned savings.
How you tap into your various accounts can make a big difference in what you may pay in taxes and what you manage to keep during a retirement that could last for decades. And yet, not all financial professionals make tax planning a priority when building an income plan.
Instead, it seems most financial professionals rely on conventional wisdom and one-size-fits-all strategies, including telling clients to spend down their assets in sequential order — starting with their taxable brokerage accounts, then their tax-deferred retirement accounts and then any tax-exempt accounts.
From just $107.88 $24.99 for Kiplinger Personal Finance
Be a smarter, better informed investor.
Sign up for Kiplinger’s Free 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.
The idea behind this approach, of course, is to let your tax-deferred money continue to compound for as long as possible before you start taking it. And for some retirees, that makes sense.
But if you happen to spend all your taxable money too quickly and then suddenly need extra cash — whether the water heater goes out, or you need to replace the roof, or some other curveball comes along — the only place you can go is your IRAs. And that can have some surprising tax consequences.
Let’s use a married couple, Joe and Jenny, ages 66 and 65, as an example. Let’s say they have $500,000 in a 401(k), $125,000 in taxable cash accounts and $54,000 in a Roth, and they plan to retire in a year. They know they’ll have to spend conservatively, but they want to enjoy their retirement, and they want a plan that will make their savings last.
As a hypothetical example, using Retirement Analyzer software, we will plug in an inflation rate of 3.28%, an annual rate of return of 6% and a withdrawal rate of $30,000 per year net to illustrate the point. Some financial professionals would tell them to spend the money in their taxable accounts first, then their 401(k) and then their Roth. And if they do that, they could run out of money as early as ages 88 and 87.
While that may sound OK, Joe and Jenny could live longer than that. They just don’t know.
The good news is they may be able to do better just by switching things up a bit — flipping the withdrawal sequence and pulling the money out of their Roth account first, then their 401(k) and then their taxable accounts.
All things being equal — the same withdrawal rate, same inflation, same rate of return — their money has the potential to last six years longer, taking them to ages 94 and 93.
Suddenly, unconventional thinking sounds pretty wise.
And they could get even more creative.
If Joe and Jenny used a “multiple accounts strategy,” pulling simultaneously (instead of sequentially) from their savings in a tax-efficient manner, their money could last until they’re 100 and 99 years old, respectively.
Now, that creates an entirely different retirement strategy!
By taking some money from all three savings “buckets,” instead of using one at a time, they could put less stress on their portfolio, and they wouldn’t have to give up as much to Uncle Sam.
It’s not a magic bullet, and it’s not necessarily the best fit for everyone, but it might be what’s best for Joe and Jenny — and for you. But it takes someone who is willing to run the numbers to come up with this type of plan.
A financial professional who puts a priority on tax efficiency can strengthen and lengthen your retirement income plan. Make it your priority to ask about this important concern.
This is a hypothetical example provided for illustrative purposes only; it does not represent a real-life scenario, and should not be construed as advice designed to meet the particular needs of an individual’s situation.
Investment advisory services offered through Elevated Capital Advisors, LLC, a Registered Investment Adviser. Insurance products and services are offered through Elevated Financial Services, LLC.
Kim Franke-Folstad contributed to this article.>
-
Medicare Prior Authorization Expands to Ambulatory Surgical CentersStarting in December, Medicare will begin requiring prior authorization for certain procedures when performed in ambulatory surgical centers.
-
Frontier’s GoWild! Annual Flight Pass: Is the $299 All‑You‑Can‑Fly Deal Worth It?Frontier’s GoWild! Pass offers unlimited flights for $299, but blackout dates, standby rules, and fees apply. See who benefits and if it’s worth it.
-
Greed, Fear and Market Volatility: A Financial Adviser's Guide to Keeping Emotions Out of Investment DecisionsDon't panic! And don't be so confident in the stock market that you overlook risk. Instead, be logical. Your retirement security could depend on it.
-
Want a Financial Adviser Who Shares Your Faith? Look for One With a CKA DesignationFinancial professionals with a Certified Kingdom Advisor certification are committed to integrating biblical principles with sound financial advice.
-
10 Ways to Stay Safe From Grandparent Scams and Other Fraud, Courtesy of a Financial PlannerScams are increasingly hard to detect, and anyone can be fooled, from older people to educated professionals. Here are 10 ways to avoid becoming a victim.
-
This Is How the Student Loan Bubble Is Primed to Pop, From a Student Funding ExpertFueled by easy money, inflated tuition and high default rates, the student loan bubble mirrors the 2008 subprime mortgage crisis. We could be headed for a potential financial collapse. What can we do?
-
More Than Money: The Hidden Toll of Financial Abuse of Older AdultsFinancial abuse from schemes involving tech support, government impostors, false sweepstakes, grandchild hoaxes and online shopping issues can cause thousands of dollars in losses.
-
I'm a Financial Planner: Here Are Three High-Impact Ways to Make a Difference With Your DollarsThe world often feels out of control, but here are three ways to use your money — through investments, charitable giving and political donations — to help create a more just and sustainable future.
-
The Unsung Hero of Aisle 5: A Tale of Forgotten Change and Compassion at the SupermarketThis supermarket manager went above and beyond to help when a child forgot her change at the checkout counter. You might be surprised at some of the complications that supermarkets face when it comes to customers' forgotten change.
-
Train, Integrate, Retain: A Strategic Playbook for Adviser OnboardingsBuild a thriving practice by training new advisers with clear goals, structured processes and consistent mentorship for strong team growth.
