Here at Streamline, we usually model out different retirement withdrawal strategies or outcomes that could play out for our clients. Right now, we’re looking at historically low tax rates in our country and as you look at history, it seems to move in a cyclical fashion. Additionally, in my opinion, there are some other reasons why taxes could be going up in the future. But since I don’t have a crystal ball, we model scenarios for our clients and we choose the one where they pay the least amount of taxes over their lifetime. In the video above, I’ll show you a visual representation of some of the options that you might have when tax planning, or plotting out your ideal retirement withdrawal strategy.

As we get into this example, here are a few assumptions about the fake client I created for this scenario:

  • He is 55 and married.
  • The client is stopping work this year, at age 55.
  • He and his wife need to live off their savings until Social Security kicks in.
  • Their mortgage is paid off and they need $4,500 a month for expenses. We assume this cost-of-living amount will increase by 3 percent each year.
  • They have three types of accounts: $1 million in their 401k, $100,000 in a Roth IRA, and $400,000 in a non-retirement brokerage account.

Given those basic assumptions, what’s an ideal withdrawal strategy for them? Conventional wisdom recommends not withdrawing from your traditional IRAs, 401ks, or other pre-tax money, until you’re forced to at age 70, or until you have to pay for income that allows tax deferred growth to compound. Now this is not always the best plan if you want to pay the least amount of taxes. This is why we model different scenarios.

Regarding our fake client heading into retirement, consider two different scenarios, one which is estimated to save over $400,000 over the clients’ lifetime.

Comparing the Two Scenarios

Our first scenario is based on conventional wisdom. Our client will start Social Security early at age 63, and is also withdrawing from his taxable account. This plan looks pretty good until the client reaches 72, and then we start to see a decline. Part of the reason this is happening is because of the increasing expenses. In this plan, they don’t really pay a lot of tax until Social Security kicks in. However, at that point there is a drastic increase in how much tax they will have to pay as they get older and their Required Minimum Distributions get larger.

Compare this to our second scenario where the client is initially withdrawing from his IRA only. He is even taking out more than his monthly expenses require and converting the excess to a Roth IRA. In this plan, the client pays more in taxes until age 72 where all of a sudden, the tax is actually close to zero. At this point in life, he might be traveling less and it’s important to have fixed expenses so paying little-to-no tax is ideal here. To avoid paying a lot of tax on withdrawals, take money early from accounts that have Required Minimum Distributions.

To see a cash-flow summary of the two plans, be sure to watch the video linked above in this post. While these are made-up scenarios, it really illustrates the difference that a retirement plan, tax plan, and withdrawal plan can have on the success of a long-term financial plan. So, the big question is, why would you leave it to the government to decide how much you’re going to pay in tax? Especially when their policy changes really impact your retirement in a big way. Whatever the government decides in the future is an unknown variable. We don’t know what tax rates are going to be in the future and when you’re planning your retirement. So why not have a little bit more control over some of the variables?

Please Remember

This video isn’t specific advice for you. I can only give advice to the people who work with us at Streamline because we know their specific situation. So please don’t make any important decisions just based on this post. It’s important that you talk with your advisor before making any big decisions. The purpose of this post is to give you an idea of some of the things you should be thinking about when you’re retirement planning and considering withdrawal strategies, with the hope that you can go to your advisor with this knowledge and then make your retirement plan and your retirement life better.

If you’re looking for an advisor who focuses on retirement planning, feel free to reach out to me. At Streamline, we think about more than just the investments.