Personalizing Your Retirement Withdrawal Strategy

You spent your lifetime working hard, diligently saving and investing money to secure your financial future. But what comes next? When it’s time for retirement, how do you take income from your savings in a way that preserves your wealth as long as you need it to? Whether you’re approaching retirement or in retirement, the right withdrawal strategy can help you manage taxes and maintain the standard of living you’ve been planning for.

What is the Right Retirement Withdrawal Strategy? It Depends.

Every client is unique, so the optimal answer depends on your circumstances, your goals, and changes in the economic climate.

An Edelman Financial Engines planner, along with your accountant, can help design a strategy for your unique situation, a plan that considers your changing needs as well as the impact on your taxes, Social Security benefits, even the amount you pay for Medicare.

Planning for Retirement Income Streams

Planning for a steady stream of income in retirement can seem like an overwhelming task. First, you must consider your expenses and expected income from a number of sources: your investment accounts, pension, part-time work, rental income, Social Security, etc.

In fact, many of our clients are not certain how much they actually spend throughout the year, or even on a monthly basis. Since financial planning is about having financial security and an enjoyable lifestyle, your planner can help you determine how much that income stream should be and will identify the income sources.

Adjusting for Income and Expense Changes in Retirement

Here is another daunting question: Do you expect changes in your income or expenses in your retirement years?

You can discuss these considerations with your planner when you discuss your desired retirement lifestyle. Your planner will help you determine whether you need to reassess how much income you may need and how long your savings will last.

For example, if you are retiring at a relatively young age and are still fit and active, you may want to draw down more income in the early years of your retirement so you can enjoy the money you worked so hard to save, then live on a more modest income later in life.

On the other hand, what if you still feel great and do not want to slow down in your late 70s? These are all big questions that your planner will help you answer. It is your first and only time in retirement, but we have done it with thousands of clients before.

Managing Market Volatility and Inflation in Retirement

As anyone nearing or in retirement now knows all too well, market downturns, increased volatility, and higher inflation can have a significant impact on your personalized withdrawal strategy. That’s why building a year or two of cash reserves is a good strategy, as it can help offset some of the impact of drawing down your investments when market values are down.

Keep in mind that early on in your retirement, you most likely will be taking a small percentage of the total account value of your accounts. That means that the rest of your balance is still invested and positioned to benefit from any portfolio growth. However, it can be uncomfortable to see account values drop, but we have been through this before and we will give you guidance on how to use those cash reserves to get you through.

Choosing the Right Accounts for Withdrawals

There are many elements to consider when you choose which accounts to draw from. For example, should you be withdrawing from one account or proportionally across all your accounts?

One approach is to withdraw from taxable accounts first, which allows your assets in tax-deferred accounts like IRAs to stay invested longer and potentially make more money. But this isn’t always the best approach because it could create a bigger tax bill down the line when Required Minimum Distributions (RMDs) kick in, possibly moving you into a higher tax bracket.

When and from where you choose to make withdrawals can also impact if or how much of your Social Security benefit is taxable or the amount you pay for Medicare. The difference can be significant. In 2024, the cost for Medicare Part B is between $174.70 and $594.00 per month depending on your income level two years prior. Your planner can join a call with your accountant to determine an option that can work for you.

Find the Right Solutions by Asking the Right Questions

Creating a withdrawal strategy is complex since everyone’s situation is different. Here are general principles we consider:

• Look for an approach that can help minimize current taxes and find an income level that will avoid pushing you to the next tax bracket.
• Discuss your desired lifestyle with your planner to determine your desired retirement income.
• Discuss other necessary pre-retirement tasks such as reviewing insurance and estate planning.
• Have fun! Retirement is a big adventure, and we are here to help you enjoy it with financial security and comfort!

For more context, here are some of the most common questions we get.

When can I start withdrawing from my retirement accounts without penalties?

• You can begin penalty-free withdrawals from retirement accounts like IRAs after age 59½. However, you must start taking Required Minimum Distributions (RMDs) from traditional IRAs and 401(k)s by April 1 following the year you turn 73 (as of 2024). Failing to take RMDs can result in significant penalties.

Are there penalties for early withdrawals?

• Yes, withdrawing from IRAs before age 59½ typically incurs a 10% early withdrawal penalty, in addition to regular income tax. There are exceptions, such as for first-time home purchases or certain medical expenses.

How do RMDs work?

• For traditional IRAs and 401(k)s, you must start taking RMDs at age 73. The amount is based on your life expectancy and account balance.

Can I withdraw contributions from a Roth IRA without penalties?

• Yes, you can withdraw contributions (but not earnings) from a Roth IRA at any time without penalties.

Why is it important to plan your withdrawals?

• Understanding the rules and potential penalties is crucial for optimizing your retirement strategy. Consulting with a financial planner can help you navigate these rules and determine the best approach for your situation.

It’s never too early or too late to start thinking about personalizing your withdrawal strategy for the retirement you’ve worked so hard to achieve. And an Edelman Financial Engines planner can help you determine the right approach for you. Give us a call today.