A Retirement Income Distribution Plan Is as Critical as Saving

Designing a strategy to efficiently use your retirement savings is a critical step on your retirement planning journey to maximize your income and ensure a long-lasting retirement.

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The majority of your life is spent in accumulation mode — earning a steady income and putting money aside for things like retirement, savings, your child’s education or a dream vacation home. After years of investing and saving, it is critical to shift your mindset out of accumulation mode and into distribution, or decumulation, mode when retirement nears. Making that mental shift is difficult for most, but having a comprehensive wealth plan that includes a retirement income distribution strategy can help.

A wealth plan ensures you won’t run out of money in retirement by preparing for your cash-flow needs, increased inflation, taxes and expenses such as health care costs, which greatly increases your probability of success in retirement. Having a retirement account is simply not enough. Without a distribution strategy, you are missing one of the most critical components of your retirement plan.

Moving Away From Accumulation

Many people save for retirement in a 401(k) or Roth IRA, but having a savings plan isn’t the same thing as having a wealth plan for how those funds will actually be used in retirement. Those who hoped to retire in 2000, 2008 and 2020 learned the hard way just how important it is to shift your mindset away from accumulation as retirement approaches. During those types of economic downturns, many investors were likely focused on accumulation, with most of their assets in mid- to high-risk equities. If retirement was right around the corner, most probably didn’t have enough time to recover from the major blow to their accounts before drawing funds for retirement.

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A wealth income plan focuses on preservation and protection of your assets as retirement nears to hedge against market volatility and economic instability. The sequence of returns five years before and five years into your retirement may have more of an impact on your success in retirement than the decades of saving.

Easing into Distribution

Shifting into a decumulation mindset should not be a sudden move. Rather, it should be a gradual on-ramp into retirement. If you are 10 or less years away from retirement, take 10% to 20% of your portfolio out of riskier investments and place those funds into asset classes outside of equities, such as an annuity that can either protect your principal or provide guaranteed growth. Within five years of retirement, aim for a 70/30 split between equities and safer investments. Your strategic wealth plan should incorporate these types of investment shifts to provide peace of mind and protection against major market volatility.

A comprehensive wealth plan not only addresses portfolio risk management, but it also incorporates strategies to lower your tax liability and maximize your income. The accumulation phase of life ends when you decide to retire, which is under your control in most situations. But the distribution phase lasts as long as your lifetime, which is an unknown time frame. Having a plan to maximize your income sources will help ensure your long-term needs are met, no matter how long your retirement lasts.

Additional Distribution Strategies

Knowing how much income you need in retirement, adjusted for inflation, will make sure you have enough liquid assets to meet your distribution needs. Use an inflation calculator to see how much your dollars will be worth in retirement as you make income projections. You may think you have enough money to retire today, but inflation has risen by nearly 4% on average (opens in new tab) over the last 50 years. Current inflationary pressures are trending much higher, so those who are near or entering retirement must prepare for potentially higher than normal inflation over the next decade.

To lower your tax liability in the decumulation phase, consider moving some of your money out of your tax-deferred accounts like an IRA or 401(k) through a Roth conversion. Your tax bill will increase in the year you make a Roth conversion, but the additional dollars in your Roth account will grow tax-free thereafter. Taxes are currently near all-time lows, which means you will likely pay less for taxes now compared to the future.

A wealth plan can help you strategize when a Roth conversion makes sense. For example, a Roth conversion may not have made sense for you a few years ago, but now that the IRS has adjusted tax brackets to account for inflation, you may be able to convert without being bumped into a higher tax bracket.

Planning ahead for your required minimum distributions, or RMDs, can also lower your tax bill during the distribution phase of life. Any money in a 401(k) or traditional IRA will be subject to RMDs, which now begin at age 73, according to new RMD rules in the SECURE 2.0 Act. Consider draining your qualified accounts one at a time by taking RMDs from your most conservative account first. This allows your more aggressive accounts to continue growing while you satisfy your requirements.

Your distribution strategy will determine the most optimal Social Security strategy to further maximize your retirement income. You can collect benefits starting at age 62, but they will be reduced by as much as 30% (opens in new tab). If you wait until your full retirement age – around age 66 or 67, depending on when you were born – you can receive your full benefit amount. For anyone who waits until age 70 to claim benefits, an extra 8% will be added annually, which could result in an additional 32% in total!

Most people are aware of the importance of accumulation, but planning for how you actually use your savings is critical for a long, successful retirement. Be proactive by creating a wealth plan that incorporates a retirement income distribution strategy to combat future taxes, inflation and market volatility. Lowering these types of variables will bring more control to your retirement, allowing you to maximize your income and ensure longevity throughout your retirement.

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 (opens in new tab) or with FINRA (opens in new tab).

Bradley Rosen
President, Longevity Financial

Bradley Rosen is the owner and president of Longevity Financial (opens in new tab), an independent financial professional with over 24 years of financial planning experience. Bradley provides each client with a customized Design for Life By Longevity FinancialⓇ plan that encompasses each part of their financial picture, including investments, insurance, taxes and legacy planning. He is passionate about creating longevity with one’s finances and prioritizing holistic health, both physically and financially. His unique approach to retirement planning is the result of watching both his grandmothers outlive their retirement income. For his dedication to educating and empowering women, he was awarded the Thelma Gibson Award in 2015. He has been featured in Forbes and on the local CBS, NBC and FOX TV news affiliates in his new hometown of Atlanta.