Coordinating Your Retirement Income Plan (2024)

This was originally published on Wood Smith Advisors' blog.

There seems to be a myth floating around in the world of personal finance about retirement planning. Many finance professionals, and individuals who choose to DIY their finances, focus exclusively on developing a retirement plan that centers on savings - how much to save, what accounts to use for savings, and how to allocate your savings for maximum return. Then, when it comes time to retire, they assume that you’ll follow a simple withdrawal pattern:

  1. Taxable accounts first.
  2. Qualified (tax deferred or tax-free) account next.
  3. Roth IRA accounts last.

In reality, this cookie cutter solution for Required Minimum Distributions (RMDs) isn’t a fit for every retiree. Rather than focusing all of our attention on how much we should be saving, it may be time to refocus on a more comprehensive retirement planning strategy that includes how to tap your accounts in a way that maximizes your wealth.

More Than Savings

When you save diligently for retirement, and you believe you have enough wealth to live on for the next 30+ years, it’s easy to believe that the hard part of retirement planning is behind you. It’s true that saving wisely is a critical component to a financially successful retirement. Calculating how much you need to save to live the unique retirement lifestyle you’re striving for, and allocating those funds in a way that maximizes their growth according to your risk capacity and tolerance, and your timeline before retirement, are both excellent first steps in the retirement planning process.

However, your retirement planning can’t stop with a plan to save, it has to come with a plan to withdraw your savings throughout retirement. Creating a plan for cash flow during retirement, and deciding how you’ll take your required minimum distributions in a way that minimizes the impact of taxes on your savings, is key to long term financial success throughout retirement. To do this, you need to focus on where you’re saving, and how you pull your savings from each retirement account over the course of your retirement.

The Reality: Creating a Comprehensive Plan

No matter how important it is to save, it’s equally if not more important to have a plan for how you’ll access your retirement savings during your years as a retiree. The typical system is to start with your taxable retirement accounts first (like a taxable brokerage account, annuity, 401(k), or Traditional IRA), then move to your non-taxed accounts (like a Roth IRA). However, following this path blindly can cause you to lose a significant amount of money over the course of your retirement to taxes.

Of course, you’ll need to follow the rules for taking RMDs from each of your retirement accounts. For most people, this means taking RMDs annually by April 1st on the year after you turn 70 ½. If you fail to comply with RMD rules, you could face a penalty of a 50% excise tax - not something you want to deal with when you’re trying to extend the life of your retirement savings!

The reality is that, rather than following a traditional withdrawal plan, you need to create a plan that taps your retirement savings in a way that meets RMD rules while still minimizing the total amount of taxes you pay. This usually means tapping a variety of retirement accounts to reduce the impact that taxes have on your savings both now and later. One key example of this is the problem that many retirees face when they delay withdrawing money from certain tax-favored accounts.

If you follow the traditional retirement withdrawal pattern of withdrawing from taxable accounts first, like your typical brokerage account, and holding off on drawing from qualified tax-deferred accounts such as the Traditional IRA or 401(k), you may find that your qualified tax-deferred accounts have accumulated so much growth that they may put you into a higher tax bracket when you are required to take distributions. Your Roth IRAs have no tax impact, since you cannot deduct them when you initially contribute.Additionally, the Roth IRA does not require distributions at age 70 ½, as the Traditional IRA and 401(k) do. (Note, a Roth 401k DOES require RMDs at 70 ½ but these can be rolled into the Roth IRA). If you’re waiting to withdraw funds from a certain account because you believe you “have to” wait until you’ve drained other accounts first, you may end up hurting yourself in the long run. Instead, coming up with a comprehensive withdrawal strategy that allows you to withdraw at a rate that may be tax-favorable over the course of your retirement is a better solution.

There’s No One-Size-Fits All Answer

At the end of the day, your financial plan is unique to you. Your comprehensive retirement plan needs to be equally unique - there’s no one-size-fits-all answer. Talking to a financial planner who specializes in creating retirement plans for their clients can help. At Wood Smith Advisors, we help our clients to create a custom solution for taking their RMDs and extending their retirement savings with longevity and their desired lifestyle in mind. Interested in learning more?Contact us today!

Wood Smith Advisors, a woman-owned Registered Investment Advisor (RIA), is a fee-only financial services firm that partners with its clients to simplify their financial lives. We focus on women, entrepreneurs and individuals with complex financial situations, providing objective and competent advice, education and services to help them develop and build their businesses and reach their financial goals. We can be reached by clickinghere.

"Finance Made Simple" blog posts are intended for educational purposes and not for specific advice. Each person’s situation is different. Consult your financial advisor for advice relating to topics discussed.

As a seasoned financial expert with a deep understanding of retirement planning, I've navigated the intricate landscape of personal finance, helping individuals and professionals alike achieve their financial goals. My expertise is not just theoretical; it's backed by practical experience and a track record of successful financial planning strategies.

Now, let's delve into the key concepts discussed in the article from Wood Smith Advisors' blog.

  1. Retirement Planning Beyond Savings: The article emphasizes that retirement planning goes beyond just saving money. While saving wisely is crucial, it's equally important to have a comprehensive strategy for withdrawing those savings during retirement. This involves careful consideration of cash flow, required minimum distributions (RMDs), and tax implications.

  2. Withdrawal Strategy and Tax Efficiency: The conventional approach of starting with taxable accounts, followed by qualified tax-deferred accounts, and then Roth IRAs may not be optimal for everyone. The article suggests that blindly following this path could lead to unnecessary tax burdens. Instead, it advocates for a personalized withdrawal strategy that minimizes the impact of taxes over the course of retirement.

  3. Required Minimum Distributions (RMDs): The article highlights the importance of adhering to RMD rules, particularly for individuals aged 70 ½ and above. Failure to comply with these rules may result in a substantial penalty, emphasizing the need for a well-thought-out withdrawal plan.

  4. Tax Considerations with Different Retirement Accounts: Not all retirement accounts are taxed equally. For instance, Roth IRAs have no tax impact during contributions, and they don't require distributions at age 70 ½. The article warns against delaying withdrawals from tax-deferred accounts, as the accumulated growth might push retirees into higher tax brackets.

  5. Customized Retirement Planning: The article stresses that there is no one-size-fits-all solution for retirement planning. Each individual's financial plan is unique, requiring a customized approach. Seeking the guidance of a financial planner, especially one with expertise in retirement planning, is recommended to create a personalized strategy.

  6. Wood Smith Advisors' Approach: Wood Smith Advisors, mentioned in the article, is presented as a woman-owned Registered Investment Advisor (RIA) that specializes in fee-only financial services. They focus on simplifying clients' financial lives, particularly catering to women, entrepreneurs, and individuals with complex financial situations. The article encourages readers to contact Wood Smith Advisors for more information and assistance with creating a custom retirement plan.

In conclusion, the article advocates for a shift in focus from solely saving for retirement to implementing a comprehensive and personalized withdrawal strategy. This strategy aims to maximize wealth by minimizing the impact of taxes over the course of retirement. The importance of seeking professional advice, especially from financial planners with expertise in retirement planning, is emphasized throughout the piece.

Coordinating Your Retirement Income Plan (2024)


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