If you’re like most people, you’ve worked a lot, put money into retirement and relied on your paycheck to pay the bills. A lot of time goes into retirement planning, and then there’s this cosmic shift where you’ll find yourself spending your retirement money.
You have all of these accounts that have grown as you tried to secure your retirement, and you may be wondering: Which accounts do I take money from?
The steps below can help you create a retirement withdrawal strategy that works well for you:
5-step Retirement Withdrawal Strategy
1. Determine Your Retirement Needs
We work and save for so long that when retirement comes, most of us don’t know our needs. You’ve built up a nest egg, and now it’s time to understand your needs:
- Essential income: What do you need to stay relatively happy? You’re not having all of the fun yet, but you need to pay your mortgage, eat and enjoy life a little bit, such as going out to dinner. Calculate this expense, which may be $3,000 to $4,000 or less and maybe even more, depending on your lifestyle.
- Wants in retirement: Do you want to travel, play golf, or spoil your grandkids? What will make retirement fun for you? It’s important to come up with your own bucket list and then put a dollar figure on each item.
Social Security is unlikely to cover all of your needs, and this is where the coming steps will help you create a withdrawal strategy.
2. Understand the Different Types of Retirement Accounts
Many people know a lot about their 401(k) accounts because they’ve paid into them for so long. Their employers may have contributed to these accounts, and it is where many people have the bulk of their wealth.
However, you may be involved with:
- Traditional or Roth IRA
- Traditional or Roth 401(k)
If you have a traditional IRA or 401(k), there is a rule that you have to take what is known as a required minimum distribution. Currently, at age 72, you need to begin taking withdrawals from these accounts every year. This age is set to increase to over the years, but right now, it’s 72.
We have a few clients who didn’t realize that they needed to take this distribution and don’t need the money. However, since these accounts are traditional, you’ll need to take your withdrawals and pay taxes on this money, creating a lot of interesting scenarios.
For example, you may have to deal with:
- Health benefit changes that are based on income
- Paying into a higher tax bracket because your income is now higher
Roth accounts do not require you to take a required minimum distribution. In many cases, we’ll discuss doing things early, such as in your 50s and early 60s, when you still have time to convert the traditional account earlier to avoid potential drawbacks in the future.
Everyone with a traditional or Roth IRA must sit down and figure out the rules of each account type that they have.
3. Figure Out Your Priorities
Year by year, your retirement withdrawal strategy can change. Nothing is set in stone, but we find a yearly strategy provides our clients peace of mind. With that said, you do need to determine your priorities.
For example, you may want to prioritize:
- Roth conversions to get into a tax-free scenario
- Tax strategies to lower future taxes
Roth conversions will trigger taxes and can impact you in the future.
We have one client who is trying to leverage a very low tax year, live on cash in the bank and do a Roth conversion. He plans to live on the cash he has saved so that the Roth conversion can happen at a rate of just 12%.
Since he is converting into a Roth account, he benefits from:
- Allowing the money in the account to grow
- Not having to take withdrawals
He is making it a priority to get his money into accounts that can grow tax-free and not have to worry about future withdrawals.
Another priority that we have seen in recent years is staying under IRMAA. IRMAA is a Medicare surcharge, and if you go over a certain threshold, you’ll need to pay higher premiums as a result.
Don’t know what IRMAA is or why it matters? Read through our guide: IRMAA Medicare Surcharges and
If you never want to go above the IRMAA threshold, this can be a priority and achieved by creating the right withdrawal strategy.
4. Manage Investment Risk
Investment risks can be complicated, but we like to keep it simple with a three-bucket strategy. The strategy includes:
- Cash in the bank that you can use as emergency money any time you need it.
- Investment bucket, which is the money that you want to grow. Some risk is involved here.
- Income or safety bucket. Let’s assume that we have an income or safety bucket, this will cover your expenses and allow your investment bucket to rise and fall without worrying about market downturns.
You can read more about our retirement bucket strategy here.
5. Be Willing the Adjust
The final step in a retirement withdrawal strategy is that you should be able to adjust the strategy at any time. Unfortunately, there is no one-size-fits-all approach or rule of thumb to follow with your withdrawal strategy.
Retirement-focused financial plans are “living and breathing.”
We want to have the ability and flexibility to adjust your plan when it benefits you the most or when priorities change. For our clients, we recommend going through their plans at least once a year.
A quick review helps you understand if you have everything to cover your life for 30+ years in retirement. If you get caught in autopilot, you may miss important changes that need to occur.
If you prioritize your withdrawal strategy, you’ll find that it’s a lot less complex than it is if you scramble to create a strategy too late.
Do you want help with your retirement planning?