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Plan Ahead: Create a Retirement Account Withdrawal Strategy

By July 17, 2023July 18th, 2023No Comments

As you plan ahead for retirement, you’ll want to work with your wealth advisor on a tax-efficient strategy for withdrawing income from various retirement accounts. One of the first steps is estimating how much income you’ll need monthly and annually.

Determine Your Income Needs

A helpful way to estimate your income needs in retirement is to analyze your current, pre-retirement expenses. Categorize them into essential (nondiscretionary) and nonessential (discretionary) expenses. Then, consider factors such as additional travel, relocation and lifestyle choices during retirement, as well as health care costs. Your life expectancy is a key factor, of course: It helps to determine how much total income you might need to take from various accounts over the course of your retirement.

Adjust Your Investment Mix

Your investment allocation reflects a balance among your goals, risk tolerance and time horizon. If you plan to leave an inheritance, you might want a portion of your assets invested more aggressively with the goal of additional appreciation. From a retirement income perspective, you’ll want to make sure you have enough liquid funds to cover up to several years’ worth of expenses. That way, your more growth-oriented investments can be left alone to potentially appreciate. Your wealth advisory team can help you fine-tune your expected income needs.

Identify the Sources of Your Income

You likely have a mix of investment accounts—401(k)s, IRAs and others. When developing an income strategy, evaluate the tax consequences of withdrawals from each account type. Distributions from taxable accounts may incur capital gains taxes, for instance, while those from tax-advantaged accounts, such as traditional IRAs or 401(k)s, may be subject to the higher ordinary income tax rate. The sequence in which you tap your various accounts can significantly impact the total assets left for heirs.

Sequence of Withdrawals

Your withdrawal-sequencing strategies should be custom-designed to fit your unique situation and goals. Many retirees withdraw from taxable accounts first, followed by tax-deferred accounts and finally Roth IRA or Roth 401(k) accounts. In addition to these accounts, wealthy individuals must often factor in additional sources of income such as rental properties and business interests.

Limit Estate Tax

Part of your wealth planning may include leaving a legacy. The size of the estate that you leave to heirs will be determined in part by the total income that you take over the course of your retirement. In many cases, planned income distributions will leave the estate above the estate-tax threshold, which is currently $12.92 million for individuals and $25.84 for married couples.1 Your wealth advisor can help you lower or eliminate estate-tax liability through a number of planning techniques including gifting, philanthropy and the strategic use of trusts for generational wealth transfer.

Plan Ahead for Retirement Income

If you plan to take early retirement within the next two years, it’s wise to start creating a plan for income now. Your plan can always be adjusted should your goals and situation evolve. By planning your retirement income carefully, you can enjoy a fulfilling retirement while ensuring the most prosperous possible future for those you care about.


1“What’s New – Estate and Gift Tax

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