If you are approaching retirement, you might be asking yourself where you should get money to pay your bills after your paycheck stops. It’s not as easy as it sounds. Most families have taxable accounts, tax-deferred accounts, and tax-free accounts. And tapping those resources in the right order can make a HUGE difference in the amount of tax you pay over your lifetime and in the total amount of money you have available in retirement.
As a fiduciary financial planner, I’m always an advocate for my clients, so I focus on individual family goals and priorities. So the recommendation about which basket of money to spend first will vary. If you want to talk about your situation, I would be honored to visit. Just follow this LINK to find a time that works for you.
Here are some ideas to consider as you begin to spend your retirement savings. Generally, I like to keep money that you KNOW you will need to spend safe. That means not subject to temporary changes in investment price. So:
FIRST – BEFORE you retire, begin to accumulate cash savings. How much? It depends, but tally up these priorities:
- 12 months of household expenses in an Emergency Fund. In case there is a disruption of other sources of income. Generally, this should be at the bank because it is:
- Safe, and
- Easily accessed.
- Extra cash for any “event spending” you plan to do in your first year of retirement. Like a big trip or new fishing boat.
- Still more cash to cover your monthly budget for the first year of retirement.
- This can be in a money market fund.
- Rates vary, but today you can find rates between 3% and 4% APY.
- Terminal date funds that come due around 12 months after your target retirement date. You will preserve principal and earn a modest interest.
- Short-term Bond funds to cover the spending for the second year of retirement.
- Diversified income fund to cover the spending for the third year of retirement.
SECOND – Since we have three years of income safely set aside we can invest funds for years 4 and 5 in a balanced stock and income portfolio. This will generally grow faster than bonds over a typical 3-year period.
THIRD – Funds for income in years 6 and later can be invested in a diversified stock portfolio to capture the higher returns of stocks over time.
FOURTH – Annually replenish your income buckets from growth of stocks. Start taking distributions from your stocks by looking at your taxable investment accounts.
- This gives tax-advantaged retirement accounts more time to compound.
- It also gives you a chance to lower your annual income in the early years of retirement. This can be very helpful as you fine-tune your accounts for maximum long-term tax advantage.
- By spending cash, you will not need distributions from an investment that will be recognized as income.
- With lower-taxable income you can consider the benefits of converting some traditional, tax-deferred accounts to tax-free Roth accounts for later use.
FIFTH – Consider Traditional IRA to Roth IRA conversions. If you have more than half of your money in traditional accounts, look for ways to shift AT LEAST half of your tax-sheltered savings to a .Roth IRA. If you avoid tax-deferred distributions in the early years of retirement, your taxable income should be lower, and the tax rate on IRA conversions will be less.
Consult with a fiduciary financial planner to help you craft the right strategy for your situation. Yes, I can do that. yes, I would be honored to talk with you about it. Just follow this LINK to find a time that works for you.
SIXTH – Review your Social Security Benefits. If you want the maximum lifetime benefit, you should try to wait to age 70 to begin withdrawals. Social Security benefits increase each year, even without new earnings credits, up to your 70th birthday.
Typically, if you wait to start Social Security at age 70 AND you live to age 81, you will receive more total dollars from Social Security by starting at 70 than starting at age 62. I always run a Social Security analysis for my clients. We identify the best strategy to maximize the lifetime Social Security benefit for their situation.
If you would like to talk about your Social Security situation, I would be honored to visit with you. Just follow this LINK to find a time that works for you.
SEVENTH – Delay withdrawing from your 401(k) and/or IRA until your Required Retirement Distributions kick in. That’s currently age 73. This money is shielded from income tax while it grows and the longer you let it compound, the better for you.
EIGHTH – Start tax-deferred distributions with traditional tax-deferred retirement accounts. Save your Roth money to the end. You will maximize the benefits of tax-free growth, and if it gets transferred to your heirs, they will receive the money WITHOUT an income tax bill attached. And, remember, Roth IRAs do NOT have a Required Distribution at age 73. So this is a great place to keep money growing efficiently.
NINTH – Maybe you will need some help. Your situation is unique. You might benefit from the advice of an experienced, highly trained CERTIFIED FINANCIAL PLANNER™ professional. These professionals have a depth of knowledge AND a commitment to act as a fiduciary who looks out for your best interest. They can be a great resource as your craft your personal retirement income plan.
Yes, I am a CFP® professional. I’m always a fiduciary and I work on a fee basis. And yes, I’m still taking on a few great families to be part of my financial planning practice. If you would like to talk about your retirement income strategy, I would be honored to visit with you. Just follow this LINK to find a time that works for you.
If this article has you thinking about your own circumstances, contact my office at firstname.lastname@example.org. I am always happy to meet with people who are working on their retirement plans. Dunncreek Advisors does not provide legal or tax advice, nor is this article intended to do so.