When you first started planning for retirement, your goal was likely to save as much money as possible and have your investments generate the biggest returns possible. But as you approach retirement, there’s never been a more important time to protect your nest egg.
That is where a solid retirement income plan comes into play. Here we touch on a few steps to building a strategic plan that meets your individual goals and needs, allowing you to enjoy your golden years to the fullest.
Develop a withdrawal strategy. When it comes to having a solid withdrawal plan, we recommend to our clients one of the three strategies:
- The “4% Rule”: This strategy involves withdrawing 4% of your retirement savings the first year of retirement and then doing the same for each subsequent year while also adjusting for inflation. For example, you have $800,000 in your IRA and withdrawal $32,000 the first year of retirement. Inflation comes in at 2%, so the second year, you take out $32,640. This is a simple yet effective strategy that provides a steady flow of income throughout retirement. However, it doesn’t factor in changing spending patterns.
- Dynamic Withdrawal: This strategy involves adjusting withdrawal amounts each year based on investment performance, i.e., taking out returns when they are high. This is a great strategy because withdrawals can be adjusted to reflect your spending patterns. However, it can be complex. That’s where a knowledgeable financial planner such as Maggi Tax Advisory & Financial Group can help.
- Bucket Method: This strategy involves creating different savings vehicles to meet specific goals. For your short-term needs, you should invest a certain amount of money into low-risk accounts (CDs) and a high-yield savings account. For long-term goals, we recommend that you invest in more aggressive accounts due to the longer time horizon.
Create a tax strategy on retirement plan withdrawals. Fortunately, there are plenty of ways to minimize taxes on retirement plan withdrawals. One effective strategy is to take the smallest tax hit first. Start withdrawing retirement funds from taxable investments such as a brokerage account which will be taxed at a capital gains rate. The earnings on withdrawals from tax-deferred accounts such as IRAs face the higher federal income tax and should be the last accounts you pull from.
Roll savings into a Roth IRA. If you’re investing in a 401 (k) or IRA, you are required to take minimum distributions once you hit age 70.5 and all earnings on these withdrawals will be taxed. By converting these funds into a Roth IRA (savings that are funded with your after-tax dollars), your withdrawals will be tax free as long as you’ve had the account open for at least five years.
Minimize taxes on social security benefits. Social security benefits are taxed once your income reaches a certain level. To minimize these taxes, we recommend the following two strategies:
- Limit your traditional IRA withdrawals. This will help keep your combined income below a threshold. *Roth IRA withdrawals, on the other hand, don’t count towards your combined income.
- Delay collected benefits until you reach age 70, and until then, pull funds from an IRA or 401 (k). This allows for a smaller portion of your income to come from your IRA, which can be a large amount of your combined income. By doing so, you can lower your combined income under the level that triggers taxes on benefits.
Let us help you build a solid retirement plan!
With strategic planning, Maggi Tax Advisory & Financial Group can help you build a solid retirement plan. To learn about our financial services, please call our Hillsborough office at (813) 850-0131 and our Pinellas/Pasco office at (727) 351-6168.
