Ep. 206 – Retirement Withdrawal Strategy
In this Episode of the Secure Your Retirement Podcast, Radon and Murs discuss the five different things to consider when it comes to withdrawing your retirement money. To successfully establish an income stream in your retirement, you must be strategic when taking money from the retirement accounts you’ve built over the years.
Listen in to learn how to determine your spending during retirement and which accounts the money will come from. You will also learn the importance of being flexible to make changes to your strategy as things and priorities shift over time.
In this episode, find out:
● Determine your retirement needs – understand how much you’ll need and build a plan.
● Understand the different types of retirement accounts, the rules around them, and how they play out.
● Determine your tax priorities and understand the pros and cons of your decisions.
● Manage investment risks using the bucket strategy (cash in the bank, investment, and safety buckets).
● Be willing to adjust your strategy over time as priorities change, preferably annually.
● “You need to understand the rules around traditional IRAs and traditional 401Ks and how that’s going to play out.”– Radon Stancil
● “A retirement-focused financial plan in our eyes is something that is living, breathing, and is going to go through some changes.”– Murs Tariq
If you are in or nearing retirement and you want to gain clarity on what questions you should be asking, learn what the biggest retirement myths are, and identify what you can do to achieve peace of mind for your retirement, get started today by requesting our complimentary video course, Four Steps to Secure Your Retirement!
To access the course, simply visit POMWealth.net/podcast.
Here’s the full transcript:
|Radon Stancil:||Welcome everyone to Secure Your Retirement. This podcast is really designed around helping people get to and through retirement. And today we have the conversation just about that, around that transition period where we’re moving into retirement and we’re trying to figure out how am I going to have an income stream. And I always say people think about it for decades, many people 30, maybe even 40 years. You work and either you have a business or you work for an employer and you get income. And most of us that have gotten to a successful retirement, they basically get to retirement and they have just worked and saved, and all of a sudden now you’re going to completely do the opposite. You’re going to take those accounts that you’ve worked so hard to build and you’re going to start taking money from them. And it’s a very different, foreign way of thinking because it’s just the exact opposite of what you’ve done for so long.|
|And so what we want to do is talk a little bit about a withdrawal strategy. Many times whenever Murs is sitting down with people and they say, “Well, okay, I understand that this is how much money I need, but where do I take the money? How do I take the money? What’s the best account to take it from?” And so our goal today is to really walk you through five major things to think through. And there’s going to be some subcategories in there, but really five different things to consider when it comes to this idea. So we’re going to start off here with the first one, and Murs is going to take it. Determine your retirement needs.|
|Murs Tariq:||Yeah. So I think it’s like Radon said, we work so long, we save for so long, and we get to this concept of retirement, and all of a sudden it’s, well, how are we going to spend money in retirement? I think that’s the number one thing you got to understand as you’re trying to come up with some type of withdrawal strategy. Because yes, savings is important, building up that nest egg is very important, but also, we always say this, what is equally important is how are we going to spend it. So understanding what those numbers are, understanding what the bills are, whether you have a mortgage or not, your normal living. And we really put into two different categories, your essential income needs, and your wants.|
|And then if you want to throw in a third category of gifting or legacy. But the two major ones are what’s going to keep the lights on, what’s going to keep you fed. And I coined the phrase of “stay relatively happy.” We’re not doing everything, we’re not having all the fun yet, but we’re staying relatively happy. So that may be just going out to eat or just doing little things here and there. What does that budget look like? Is it $3,000 a month? Is it $5,000 a month? Take a look at what that expense is, and then we get to get into the fun part of what retirement should be. What are our wants? What do we want out of retirement? Is it travel? Is it a membership to a club or golf? Is it taking time to just spoil the kids and grandkids because you weren’t able to because you worked for so long and you traveled a lot during work? What is the wants to you? What’s going to make retirement fun for you?|
|Kind of goes to the idea of a bucket list that we’ve all heard of, but I would encourage you to start thinking about what that bucket list is for you because knowing that and understanding the cost of that bucket list item, we want to try to incorporate that. So the gist of this is determine your retirement needs, understand how much you’re going to need. Once you understand how much you’re going to need, now we can start building a plan around, well, where is this going to come from, right? There’s social security, but social security is not going to cover all of that for most people, and so then we have to come up with a withdrawal strategy for the rest of that.|
|Radon Stancil:||All right. Number two is understand the different types of retirement accounts. Now, most people are very familiar with a 401(k). Many of us have those through our companies and we fund those, and that’s where a lot of people have a bulk of their wealth. But there are different types of plans that you may get involved with. Maybe you worked at a previous employer, you move that old 401(k) to a traditional IRA. What we’re seeing a lot more today as well is that many company plans are offering traditional 401(k) or pre-tax, and then they are also offering Roth 401(k). So whenever we move or are dealing with that account, there’s two different types of money there. You could have a traditional IRA, you could also have a Roth IRA. And so as you’re thinking this through, there are some things that regardless of whether or not we want the income, there may be forced income.|
|And the way this works is, in a 401(k) traditional or a traditional IRA, so not the Roth stuff, just the traditional side, the IRS or the government, whoever you want to say is responsible for this has made a rule that you have to take a required minimum distribution. Currently, that is age 72. That is going to move a little bit over the years, but for right now, that’s 72. So what that means is, if we don’t think this thing through, we could find ourselves, and we run into this all the time by the way, where we have somebody who just didn’t even wasn’t thinking about it, and all of a sudden if you have a sizable 401(k) or IRA, you could have a very large income coming in and you may not even need the money. But you have to take it, pay the taxes on it, and that can create all kinds of interesting scenarios. It could affect how your Medicare premium, what that is. It could trigger extra taxes because we’re in a higher tax bracket.|
|Now, the Roth IRA, you do not have to take a required minimum distribution. So many times one of the things that we have to think through when it comes in our withdrawal strategy is do we do things early to prevent an excess of income that’s going to be taxed and create other issues. Now, that is really good if you’re doing this in your sixties and that kind of a thing, or late fifties so that we’ve got time that we could actually transition assets to where we don’t have to take that money out. But if we know it’s coming, we got to think about it. So maybe we use one type of an account today to get us by because we know that at 72 or whatever that age is that my required minimum distribution occurs, I can have that money coming in.|
|So we’re not trying to go into all the nitty gritties of how the IRAs and all that works and what those amounts are. Just put this in your mind, you need to understand the rules around traditional IRAs, traditional 401(k)s, and how that’s going to play out. So all we’re trying to do right now is say, let’s make sure I understand it and then I make sure I got a plan to know what’s going to be coming in, that’s the key here.|
|Murs Tariq:||All right, so moving into now we understand our retirement needs, we understand our retirement accounts and the taxation that comes with them, and now we got to determine our priorities. And by the way, when it comes to coming up with a withdrawal strategy, this is relatively fluid in the sense that we want a… This could change, we’re not making a plan here that we know is going to be for the next 30 years. We’re making a plan year by year and we can make changes if we need to. And so now we want to talk about determine your priorities. And really what we’re talking about here is tax priorities. And there’s multiple strategies that people start to think about when they do retire as far as, well, can I create some more tax-free income, or how do I stay under certain tax brackets, all these different things because a lot of our assets have not been taxed yet.|
|And so the most common one that we talk about right now is Roth conversions. Roth conversion is the act of taking that traditional IRA that Radon was talking about and getting it into the Roth account, the tax-free bucket. The caveat here though is that if you do a Roth conversion, move it from traditional IRA to the Roth, there is taxes that are due on that move. So say you do a $100,000 traditional or a Roth conversion, a $100,000 Roth conversion, that’s going to be a $100,000 that’s added to your income for the year. And so while it sounds great to get money into a tax-free scenario, we want to understand what the pros and cons are of things like that. Radon, you were telling me about a client that we’re working with right now that is strongly wanting to do Roth conversions, and having different buckets of assets are going to be key to making that Roth conversion work in the most efficient manner. So do you mind just walking us through that one?|
|Radon Stancil:||Yeah. So ultimately what’s going on in his particular situation is he’s taking advantage of what could be a very low tax year. So the way it is working is he’s retired and so he has some cash assets. Now that could be a brokerage account or cash in the bank. He has cash in the bank that he’s been saving up. And so what he’s going to do, because that money’s already been taxed, it gets taxed every year, he’s going to live on this year the cash in the bank. Which means essentially he’s strategically not going to take social security yet, live on the cash, and that’s going to allow us to do a very good Roth conversion and keep ourselves in a low tax bracket.|
|In his scenario, we’re going to do a very sizable amount, never go above the 12% tax bracket. We’re going to do that again next year. And so now what is he doing? He is transitioning money from the traditional taxable side that has to have that money coming out at 72 over into the Roth side. Now he doesn’t have to take that money, and if he does take it in the future. Let’s say that he puts the money in the Roth, in the next 10 years it doubles, he can take it out without paying taxes. So it is a bigger plan than just doing a Roth conversion and he’s taking advantage of these dollars that he has that’s already been taxed.|
|Murs Tariq:||Yeah. So while the Roth conversion and the Roth IRA itself is not really part of the withdrawal strategy, having the cash built up to cover the cost of the Roth conversion and to cover the cash flow needed to keep the tax bracket low, that is absolutely a withdrawal strategy. Now, is that going to go for year after year after year? No, it’s probably just going to go for a couple of years, and then all of a sudden we’ve got to redo the withdrawal strategy based on priorities. Another priority that we see all the time is thing under IRMAA, it’s spelled I-R-M-A-A. And depending on the day, I can tell you what that actually means, but IRMAA itself is a Medicare surcharge and there is a limit on income. And if you go above this limit on income, then you’re Medicare. So if you’re above the age 65 and receiving Medicare, your premiums Part B and Part D can get more expensive for that year. If you go over this threshold. Roughly, let’s just say it’s around 180,000, 190,000 for someone that’s married, filing jointly.|
|Radon Stancil:||Yeah, I was going to say on that point. We’re going to do an updated one for 2023. It’s very little difference. But if you go and listen to episode 177, episode 177, Murs and I did a whole entire episode on IRMAA. So if you missed that, go back and listen to 177. I would also encourage you to listen to episode 200 because we talk about the SECURE Act, which is a lot of these different things that we’re talking about and how they all tie together. But that what Murs was talking about, we walk you through every single threshold of how IRMAA would affect you. But here’s the thing, you could trip into a problem. We’ve had clients come and go, “Oh my goodness, I just got a notice and my Medicare premium is going out of the roof.” And the thing was that we just didn’t think it through. They kind of jumped into something and took some money that was taxable, got a bonus, they didn’t think about it, and that can set us up for a problem.|
|Murs Tariq:||Yeah. So, IRMAA, again, it’s not really the withdrawal strategy, but someone may have a priority of saying, “I don’t ever want my Medicare premiums to go above what they are. I don’t ever want to go into that surcharge type of scenario.” Well, then all of a sudden that lays out part of the strategy for us in the sense that we got to keep income under a certain threshold. So it may be that we can’t just take everything from the IRA assets and maybe that we have to do a combination strategy taken from the pre-tax but also taken from a taxable account or some cash sets available, and also looking at the spending plan in general. So I say this all the time, with retirement planning that you turn one knob in retirement and it’s going to turn a bunch of other knobs, and we need to make sure we’re keeping track of what those knobs are and how they move, especially in regards to income.|
|Radon Stancil:||All right, number four, manage investment risk. Now, Murs and I, we try our best just to keep things simple, and we really want to help people just see things in a way that keeps their minds right. And we talk about really kind of having three buckets and those three buckets if you think about it, one bucket is going to be cash in the bank, emergency money. I can just go get this money if I got to go do something and I need to get to it quick. Whatever you keep in there is really kind of personal. And then we have an investment bucket. That investment bucket is going to be, I want this money to grow. So it’s a growth bucket.|
|And I understand there’s going to be some risk on that money, but we encourage everyone to have an income or safety bucket, and here’s why. Think about this for a second, if I’ve got my growth money out there, and let’s say we have a year like last year and the market’s down and maybe my portfolio’s down, but I have an income or safety bucket, and in that income and safety bucket it’s providing all the income I need. I’ve got that, I’ve got social security, I’ve got my pension and I’ve got this other money in here and I’ve got all the income I’ve got coming in, I don’t have to go anywhere else outside of that bucket. If that account is down, whatever it’s down. If it’s down 10%, 15% in the growth bucket, I’m not worried about it. I’m not having to go and figure out that I need to sell something at a loss or I got to go get the money out of there for the opportunity for it to grow again because I’ve got my income and safety bucket.|
|So that powerful thing I’m telling you, we use this with all of our clients, this bucket strategy. And I will tell you that provides peace of mind like none other because you can see it. In fact, with all of our clients today, we update them and we show them their bucket list. And they look at it and they go, “Wow, this is really good because I can just not have to worry about the growth bucket because I got the income safety bucket.” So that is all called… Risk management is what that is. So if you’re thinking about your process and you don’t really understand maybe what money falls into those three buckets, you might want to do a little bit of research on that topic.|
|Murs Tariq:||All right, and the last piece about coming up with a retirement withdrawal strategy is you got to be willing to adjust your strategy over time. We believe that there is no one size fits all. There is no rule of thumb that’s going to work for everyone. Rules of thumb like that 4% rule and things like that, they’re good to know and good to understand, but realize a retirement-focused financial plan in our eyes is something that is living and it’s breathing and it’s going to go through some changes. We can’t predict every single thing that’s going to happen over the next 30 some odd years of your retirement, and so we want to have the ability and the flexibility to make changes as things come along or as priorities change.|
|Go back to that person that Radon was talking about. There’s only a two-year opportunity here where we can do some heavy Roth conversions, after that, the strategy changes. And then RMDs are going to click in 10 years from now, the strategy changes again. So we want to have a plan that is fluid and we want to visit that on an annual basis in our opinion. At least once a year, you want to take a look and see, hey, am I on track? What am I getting from social security? What am I getting from other assets, and how is this all playing together? And is it all going to work? Is it going to provide what I need for the next 30 some odd years? And not just me, but also my family. Is there going to be money left over? So we look at legacy planning.|
|All those different things, you want to be talking about that with your advisor at least once a year to make sure that your plan, while it’s great today, we want to make sure it’s great for the next 30 some odd years. And the only way to do that is to take a look at it and don’t get caught on autopilot.|
|Radon Stancil:||So if you’re listening to this and you’re feeling overwhelmed, don’t let it, that’s not our goal. Our goal is to say, look, there are planning features that you can put into place, there’s planning objectives you can put into place that can help you have true peace of mind, but it does take a little bit of forethought. Now, if you’ve been listening to this and you’re thinking, man, I heard those five, but I’ve been on a walk or on a drive and I haven’t written them down. Don’t worry, I’ll always remind you every single episode, go to the website, pomwealth.net. Go to the blog page, we’ve got an entire blog article written on this particular topic.|
|If you’d like to talk to us about it and say, how does that bucket strategy work? I don’t understand what you were saying about that, could you explain it to me? How would I look at assets? What assets would fit into each one of those buckets? Go to our website, top right-hand corner, click on schedule call. Our calendar will come up, you can hop on a call, completely complimentary. Myself or Murs either one will hop on a phone call with you and answer any questions that you might have. I just want to say retirement planning is not something that we will ever do more than probably once in a lifetime. We’re talking about a lot of different topics on this show, don’t let it overwhelm you, just know that there’s a way to be able to solve it. We hope this has been helpful. We hope you have a great week. We’ll talk to you again next Monday.|