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Tips for Retirement Income Planning

Much time, energy, and thought are put into the fundamentals of saving for retirement before retirement happens – how to allocate assets, understanding the benefits of tax-advantaged retirement accounts, etc.  Less emphasis is put on how to withdraw the funds once you’re in retirement.

Retirement income planning involves individualized, complex, and interrelated considerations which can be overwhelming – unless you have the right tools and experienced advice.  At BWM Financial, clients have their own detailed and organized financial plan. This sophisticated software which helps us objectively weigh a variety of factors.  We distill those into actionable recommendations and provide clients with a convenient, monthly direct portfolio “paycheck” deposited into their bank account.  Each situation is unique.  However, there are common themes for withdrawing from the portfolio you’ve worked so hard to accumulate and grow. Here’s a list of do’s and don’t’s to consider:


Diversify – And not just in terms of asset allocation. You also want to diversify the type of account from which you draw income (taxable, IRA, Roth, Healthcare Savings Account, 529, etc.) to provide tax control and make the most of our progressive tax system. It can make sense to take distributions from traditional IRA accounts, which are taxable as income, and then use accounts with less tax impact (Roth IRAs) for additional distributions as needed.

Consider Estate Planning Goals – All account types are not created equal when it comes to gifting to your heirs. For example, traditional IRA accounts are a poor choice for inherited assets because the heirs are forced to take required distributions each year, which add to their taxable income. Beneficiaries of traditional IRA accounts also lose a key tax benefit – a step up in cost basis. On the other hand, Roth IRAs can be especially valuable as inherited assets because they grow tax free over a lifetime, which makes them a valuable wealth accumulation vehicle. Although the IRS does require minimum distributions from inherited Roth IRAs, this money still maintains tax-free status.

Mind the Big Picture – Most families rely on more than just investment income in retirement, so consider when and how you will pull from income sources such as Social Security or pensions when creating your retirement income plan. There’s a tradeoff involved based on your decision. In general, taking guaranteed income early results in a reduced monthly payment, but you can also pull less from your portfolio at that time. Delaying Social Security or pension payments can result in higher monthly income later, but larger portfolio distributions in the meantime. A thorough retirement income plan will consider these tradeoffs.

Avoid Unnecessary Capital Gains – A good idea when taking distributions from a taxable retirement account is to withdraw the income generated by the account first. This strategy can help you limit capital gains taxes by avoiding the sale of investments for as long as possible. Many investors automatically reinvest dividends and interest in their taxable accounts, while tapping the same account to support retirement spending needs, which results in paying taxes on dividends and interest earned.

Think Strategically About Charitable Giving – IRAs make especially good sources for charitable bequests and gifts that can be made after age 70. Many investors leave assets to both family and charitable organizations. Charities are tax exempt, but family members aren’t, so consider giving assets with the highest income tax burden to charity while leaving assets that get a step up in basis or tax-free treatment to family members.


Put All of Your Eggs in One Tax Basket –  By only contributing to a traditional 401(k) account during your career, you will end up with just one type of retirement account where each dollar withdrawn is taxable as income. When large expenses come up in retirement, portfolio withdrawals can create high tax bills, which may force additional withdrawals to cover the taxes. Similar situations arise early in retirement when expenses are highest and before other retirement income (such as Social Security or pensions) begins. These situations can quickly “snowball” and lead to an inefficient outcome – unnecessarily high tax bills in some years and extraordinarily low tax costs in others.

Waste Low Tax Year Opportunities – In the years when your income is low, without earned income from employment and before Social Security and required minimum distributions, take advantage of the opportunity to pay taxes at a lower rate. It may be wise to strategically convert part of an IRA account to a Roth IRA to create taxable income today in exchange for tax-free growth in the future.

Overlook Mandatory Income Sources – Always start an income plan with spending your required minimum IRA distributions (RMDs). Many traditional retirement accounts force owners to take annual distributions over the course of their retirement and pay taxes on those. If you need portfolio income, it never makes sense to take these required minimum distributions, pay taxes, reinvest them, and then fund retirement needs from other accounts. Always spend RMDs first!

Accidentally Sell Low – Once you know the amount you’ll need from your portfolio in a given year, and which is the best account to withdraw from, you’ll need to select investments to sell (assuming the income generated by the account is insufficient). Even if it seems intuitive, resist the urge sell your worst performing holdings because this action often leads to underperformance and suboptimal portfolio risks.

Ruin the Recipe – Think of an investment portfolio as a recipe with different asset classes as the ingredients. Combine them in the right proportions, and you have the right formula – an investment mix that meets your time horizon, need for income, desire for growth, stability and liquidity, and protection from inflation. Much like a chef, a good financial planner would never remove a key ingredient from a portfolio and would counsel you to avoid the temptation to sell specific investments and alter the purposefully designed portfolio recipe. Instead, sales should come from all portfolio holdings in proportion to how they’re owned, which allows the portfolio manager to adjust the recipe as needed over time.

Push Your Luck – Certain specialty accounts, such as Health Savings Accounts (HSAs) or 529 College plans, offer tax advantages for saving toward specific goals.  These benefits can be substantial over long time horizons, but only if used to cover qualified expenses.  Unused funds can be subject to taxation or penalties. Avoid saving too much for college or healthcare costs.  And don’t wait too long to spend designated funds in hopes of a bit more tax deferral.

The right retirement income strategy is critical to securing a sustainable retirement, cutting your lifetime tax bill, and leaving more funds to heirs and charity. At BWM Financial we help our clients determine how much they need to withdraw from their portfolio each year, which accounts to use for those withdrawals and the best order in which to take the withdrawals. Everyone’s situation is different, and while rules of thumb can be useful for income planning, they are not a substitute for experienced advice on complex tax planning, investment planning, and estate planning. We help you weigh your decisions with thoughtful and objective planning that asks the right questions and arrives at an optimal strategy.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.

BWM Financial, Stratos Wealth Partners and LPL Financial do not provide legal and/or tax advice or services. Please consult your legal and/or tax advisor regarding your specific situation.

The Roth IRA offers tax deferral on any earnings in the account. Withdrawals from the account may be tax free, as long as they are considered qualified. Limitations and restrictions may apply. Withdrawals prior to age 59 ½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Future tax laws can change at any time and may impact the benefits of Roth IRAs. Their tax treatment may change.

Contributions to a traditional IRA may be tax deductible in the contribution year, with current income tax due at withdrawal. Withdrawals prior to age 59 ½ may result in a 10% IRS penalty tax in addition to current income tax.