A Reasonable & Wise Withdrawal Strategy

Retirement planning involves more than just diligently contributing to your accounts over the years; it requires a well-thought-out withdrawal strategy. As you approach the milestone of 59 1/2, the age when early withdrawal penalties no longer apply, it’s crucial to understand your options so you can navigate the complexities. I want to give you some key considerations and ideas to optimize your retirement account withdrawals for a long, financially secure, and stress-free retirement.

Nail Down Your Expenses

Precise knowledge of your expenses is fundamental to crafting an effective withdrawal strategy. Understanding your financial needs allows tailored withdrawals, ensuring you neither overspend nor live frugally during retirement. One of the most common gaps we encounter is that clients don’t have a firm grasp on what they are spending. The most effective way to bridge that gap is to be on a detailed monthly budget where you’ve learned to give every dollar an assignment and committed to tracking those expenses. It seems daunting, I know, but I’ve got tons of experience budgeting, so I can teach you the tricks of the trade. If you form that habit now, you’ll be a seasoned budget artist later. The key is to be all in and on the same page with your spouse if you’re married. Remember, a budget is a plan to spend. The purpose is to give you guilt-free freedom within wise limits.

The 4% Rule: to use or not to use?

A widely recognized guideline in retirement planning is the 4% rule, which suggests withdrawing 4% of your retirement savings annually to sustain your lifestyle. While it serves as a general benchmark, individual circumstances warrant a more tailored approach because market fluctuations are inevitable, and relying solely on a fixed withdrawal rate isn’t prudent. You’re especially susceptible to what is called the sequence of return risk, which is the idea that if the market performs poorly in the first years of retirement, it’s difficult or impossible to make back that ground because you’ve had to take principal from your investment to make it through the downturn. We consider a couple of ideas to mitigate that risk.

Cash Buffer & Adaptive Withdrawals

First, we can consider having three to five years’ worth of living expenses in cash or cash equivalents. This reserve acts as a buffer, allowing you to weather market downturns without being forced to sell investments at a disadvantageous time. As you spend down one of the buffer years, we replenish those dollars from investments that have done well. Cousin to that idea is recognizing that the market rarely adheres to a consistent average return. We plan to replenish your cash reserve or spend cash more freely in years of robust market performance. Conversely, in years with negative returns, we rely on your reserves to cover expenses, avoiding unnecessary selling of depreciated assets. The major benefit of this approach is that you have more control over when you sell investments and can potentially grow your investment account balance over time. However, it can quickly become time-consuming.

Projections and Optimal Mix of Accounts

Our expertise lies in formulating scenarios and running projections to unveil the optimal withdrawal rate as well as the proper mix of tax-advantaged and taxable accounts to use. Generally, withdrawing from non-qualified accounts first, followed by tax-deferred accounts, and leaving tax-free accounts last is a sound strategy. However, life events such as poor health or the death of a spouse may necessitate adjustments to your plan and emphasize the importance of periodic reassessment. Our financial planning platform allows us to develop plan alternatives and display easy-to-read charts and values that change dynamically based on the levers we pull. With that in hand, decisions become more straightforward.

Taxes, Conversions & QCDs, Oh My!

• We’re always considering the tax implications of any strategy we recommend. No one likes paying more taxes unless it means you made a lot more money. Strategic planning can help minimize tax liabilities and let your money grow for a longer period, allowing you to retain more of your hard-earned savings. We evaluate your tax bracket and explore opportunities for Roth conversions during low-income years because you will likely pay less tax than when you were working and in a higher bracket. We are also looking to reduce Required Minimum Distributions (RMDs) through these strategies so that if you encounter an unexpected passing of a spouse or if you and your spouse have a large age gap, you don’t have massive tax bills down the road. Roth accounts have no RMD requirements during the account holder’s lifetime, and withdrawals by a beneficiary are tax-free, so we favor those types of accounts to shelter your wealth from taxes. Another way we help you manage your required withdrawals is by using Qualified Charitable Distributions (QCDs) and gifting appreciated securities directly to a charity of your choice.

Your Companion

Crafting a wise retirement account withdrawal strategy is a nuanced process that necessitates careful consideration of a wide range of factors. By tailoring the approach based on your circumstances and regularly reassessing your plan, we work with you so you can navigate retirement with confidence. If you are interested in our services or want to discuss your retirement plan, contact us today to schedule a meeting.