John is out for the next few weeks, and Devin has Brandon Renfro in the studio with him, talking about the strategies you can use to make your money last through your retirement. Brandon is uniquely qualified to talk about this, because he teaches it to others.
When you stop working, you’ve put aside some money into different types of accounts, and maybe you have a pension, or some rental property, or other investments. How do you start converting those assets into an income stream that will last for the rest of your life?
The first thing you want to do is to look at the tax-efficiency of each type of account. Part of making your money last is it make sure you aren’t paying more taxes than required. There are three categories of investments you may have: are tax-deferred, tax-free, and also taxable investments (you’re likely to receive a 1099 for these each year).
Your retirement drawdown strategy needs to be sustainable but it should also be tax-efficient.
Ideally, you’ll start these strategies a long time before you retire, putting money into the right type of account as early as possible. As you start to get closer to retirement, there are a few other factors that need to be considered as well.
First, you start looking at the account level: which account do we take the withdrawals from?
It often makes sense to take money from your taxable accounts first, because logically we know those aren’t going to grow like one of the tax-sheltered accounts because of the tax drag. But you can kind of extend that analysis some, with the idea of starting to convert some of your tax-deferred money into a Roth account by doing partial Roth conversions.
How much should you convert each year? The basic idea is that you convert up to an amount that lets you stay at a marginal rate that is lower than the marginal rate you would otherwise withdraw at if you wait and take that entire withdrawal later from that taxable account.
The strategy here is that you would take the distribution from my taxable account to live on, and then with the tax-deferred account, you would do a partial conversion to a Roth IRA.
But then there are entirely different considerations if you receive Social Security benefits – there may be a way to lower the amount of taxes that you pay on your Social Security benefits. You do almost the opposite of what was suggested before. You would start by taking distributions from your tax-deferred accounts first. You’re trying to avoid the “tax torpedo,” where your Social Security income is taxed at a higher rate because you have higher overall income. Once you reach a certain amount of income, there’s not a lot you can do to avoid those taxes. But lower- and middle-income earners may benefit from taking distributions from their tax-advantaged accounts first.
None of these are the single right answer for you. The tricky part is that when you’re trying to determine which strategy you should use for your specific situation. This really requires the help of a tax advisor, someone that you can run these scenarios by and can take a look at your own taxes and see what you’ve got happening. It really takes this collaborative approach, the Big Picture Retirement approach, to make sure you aren’t making the wrong steps.
Join us next week for a conversation about the distribution methods – making sure you have enough income to last us throughout the remainder of your retirement.
The tax torpedo
The Net Unrealized Appreciation Rule if you own company stock
Provisional income and how much of your Social Security is taxable
Resources mentioned in this episode:
The Big Picture Retirement organizer available at BigPictureRetirement.net/getorganized
Brandon’s article on the 4% rule
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