Stretching Your Dollar - Retirement Asset Withdrawal Strategies That Work
This article was published in the August 2024 issue of the Traverse City Business News and can be read in its entirety below. Black Walnut Wealth Management contributes articles and is featured in various media outlets.
You’ve spent decades diligently building up your retirement savings - now it’s time to make it work for you. As you transition into this new phase of life, it’s crucial to see that it lasts.
Many of our clients have shared that navigating all the new tax rules and financial decisions can be a significant challenge as they retire. That’s why we’re here to offer several straightforward retirement asset withdrawal strategies to help you sidestep the common pitfalls and safeguard your retirement for the long term.
Tax Rules
Implementing retirement asset withdrawal strategies is essential because there are more tax rules to consider in retirement than there are when you’re working. And each decision you make affects more decisions—it’s like a domino effect.
An example: It’s important to have the right balance between tax-deferred accounts (like a 401(k) or IRA) and tax-free accounts (like a Roth IRA). If you don’t have a good balance, you could consider a more strategic option, like a Roth conversion.
A Roth IRA conversion, a key part of retirement asset withdrawal strategies, involves moving money from a traditional IRA to a Roth IRA. Doing this in years where your income is lower could help reduce future tax liabilities on withdrawals.
However (and here’s where that domino effect kicks in), if you do that, not only can it affect your income taxes for the current year, but it could also impact how much you pay in Medicare payments, and how much tax you pay on your Social Security benefit.
There are a lot more moving parts to consider, just like this one. One mistake or overlooked decision could result in an unexpected tax bill. But there’s hope. It is possible to lower taxes during retirement—or at the very least, eliminate unnecessary ones.
The Right Combination of Growth and Income
I’ve seen many retirees limit their portfolios to stable investments like bonds and CDs. In my professional opinion, it’s more important to maintain a balanced asset allocation during retirement.
Given the historically low returns of CD and bond investments, the unpredictability of inflation, combined with whatever distributions you’re already planning to take, you’re putting yourself at major risk of running out of money during retirement if you don’t diversify.
That’s why having the right combination of growth-oriented investments and income-generating assets is critical to any retirement asset withdrawal strategy. While bonds and CDs are often perceived as lower risk, integrating stocks or real estate can provide potential growth and balance out the lower returns and inflation risks posed by these assets. What’s more, if the growth from these investments qualifies as capital gains, it may be taxed at a lower rate than ordinary income. This can help significantly enhance the tax efficiency of your portfolio.
This strategic asset allocation is designed to help your funds last longer, giving you a more comfortable financial cushion throughout your retirement.
Withdrawal Order
Choosing the right sequence for withdrawing from your retirement accounts is vital for safeguarding your future and a cornerstone of retirement asset withdrawal strategies. It’s wise to take a close look at your distribution plan across your taxable, tax-deferred, and tax-free accounts. This careful planning not only optimizes your tax situation for this year but also shapes your finances a decade from now. That’s why it’s important to think about the long-term impact of your current decisions.
For instance, starting withdrawals from taxable accounts can help reduce taxes early in retirement, allowing tax-deferred accounts more time to grow. On the other hand, integrating withdrawals from a Roth IRA later in retirement can provide tax-free income and potentially reduce the taxable amount of Social Security benefits.
In other words, while taking money from one account right now might seem like a good idea, you should consider how that decision might play out in 10 years. Strategically timing these decisions is crucial to maintaining financial stability throughout your entire retirement.
Social Security Decisions
While it might be tempting to withdraw your Social Security benefits as early as possible at age 62, the sooner you start, the lower your benefit amount. It’s important to consider the long-term effects of that lower amount, and how it could potentially impact your lifestyle during your 70s, 80s, and 90s.
Additionally, if you’re still working and receiving a paycheck and you withdraw Social Security benefits, there are significant tax ramifications to consider—and even more when you add a Roth conversion into the equation.
For married couples, particularly where one partner earns more, there may be certain advantages to delaying benefits. Not only does the primary earner receive a larger monthly benefit, but if they pass away first, their spouse can also receive this higher amount. This can provide a stronger financial cushion for the surviving spouse in later years and help maintain financial stability.
Choosing the Right Medicare Plan
Thinking about retiring before age 65? Remember that Medicare doesn’t kick in until 65, which means you’ll need health insurance to fill the gap until Medicare is available.
When eligible, you can sign up for the Original Medicare (parts A and B) or a Medicare Advantage plan. If you opt for Original Medicare, you may also consider a Medicare Supplement plan to cover extra costs. Each option varies in price, coverage areas, co-pays, and deductibles.
Keep in mind that if you don’t enroll in the right time frame, Medicare actually penalizes you with higher premiums for the rest of your life. Also, if you’re working past age 65, be mindful of how your employer’s health insurance may affect your Medicare options.
Plan for Longevity
As you plan for retirement, keep in mind that rules and regulations can change with each new session of Congress. As people live longer, it’s important that your retirement savings lasts for your entire lifetime.
A Certified Financial Planner® professional can help by working with you to find a sustainable withdrawal rate, a smart investment strategy, and suggestions for when to withdraw Social Security. All these decisions can affect your odds of having enough money throughout your lifetime. Consider seeking professional guidance as you pursue a confident financial future and strategize for your retirement savings to last as long as you do.
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