Retirement Withdrawal Strategy

everyone the lesson here for money evolution in today's video I'm going to be helping you to work out your retirement withdraw strategy so if you're somebody that's actively planning for retirement maybe you're getting a little bit closer and you're really trying to figure out how you're gonna make that leap from working and the cash flow that you have coming in while you have a job into maybe those cash flow gaps when you don't have that money coming in where are you gonna take the money what's the best way to do that that's what we're gonna dive into here in today's video but this video here today although we're gonna be talking about where to take that money from remember kind of the first step in this is understanding what those retirement gaps are and to do that you really need to kind of go through a process to figure out what it is that you're going to be doing in retirement in other words kind of creating your retirement vision so if you haven't already be sure to check out my video series that's over on our Resource Center it's called creating your retirement vision there's four videos kind of walks you through step-by-step of thinking about what you need to be doing or looking at in retirement there's some worksheets that go along with that it's also going to give you some idea of what those gaps are for your retirement and then come back to this video and then we'll start talking about now that you've identified those gaps where are you gonna get the money what's gonna be the best way to do that alright so let's jump right in so what I have up here on the screen are five common sources that you might have available for your retirement probably almost everybody watching this video is going to have Social Security probably for yourself maybe for your spouse as well if you're married you might have a pension there's still a lot of people out there that do still have a pension fortunately although younger generations obviously that's going away in a large way and then you might also have what we've often referred to as the the three primary tax buckets for different savings account the non retirement assets that are not held in any retirement account Roth or traditional and then you've got your traditional account and your Roth account so as we start to put together this plan we want to be thinking about a couple of things number one is we do want to think about the taxes and that's something we've talked about a lot I think taxes are probably one of the biggest areas that we can oftentimes add improvement for individuals as we're helping them do some planning there and a lot of times people just don't understand how these different buckets are taxed so we want to do that we also want to try to minimize some of the uncertainty with the financial markets and what we call this sequencing of return so we're going to talk a little bit about that and then you also want to make some decisions here if you have an option with your pension maybe you can you know take a lump sum maybe you can turn that pension out earlier versus later that sort of thing and then Social Security obviously you have some options there as well you can turn on Social Security benefits for most of us as early as age 62 for most of you watching this your full retirement age is probably age 67 might be 66 or somewhere between 66 and 67 you can also delay taking Social Security benefits to as late as age 70 so that's something else to think about too so there's a lot of moving parts the other thing I think we want to think about as well is especially if you're inclined to leave some money behind for your kids or your grandkids and leave them as a beneficiary on some of these assets we want to think a little bit about if you don't spend all that money in your lifetime how will this money pass along to your kids so I think that's something that kind of goes into this as well and also to for those of you that are married how you're protecting your spouse and their ability to sustain that standard of living that light those lifestyle expenses for them if something should happen to you prematurely throughout your retirement okay so let's first of all start off by talking about how these different buckets are taxed now this is something we've talked about in other videos but I think it definitely is worthwhile getting into it a little bit here so your Social Security benefits for most of us are probably going to be taxed up to 85% of our Social Security benefits in 2019 can be taxed my opinion I think that's something as they start working out some details for how to make Social Security work for future generations wouldn't be uncommon to see that maybe we're a hundred percent of those Social Security benefits could be subject to tax so you you have that your pension is also taxable and that's going to be taxed at your ordinary income tax rate and I think that's something it's an important definition to make sure that you understand but your ordinary income tax rate is the highest margin tax rate that you pay so for every additional dollar that you earn it's gonna be taxed at that ordinary income tax rate and incidentally your Social Security is also taxed at that ordinary income tax rate too but again only at this point up to 85% of that is taxed at that level now is where it gets a little bit more complicated your non retirement accounts have a couple of different types of income that could be applied there we do have a couple of preferential items those are going to be ordinary qualified dividends for most of us that's gonna be taxed at a maximum tax rate of 15% if you're in the highest tax bracket that could be 20 percent you could also get hit with the Medicare surtax in there as well that could push it up I think to like twenty three point seven two percent if I'm correct on that and then also to long-term capital gains that's also taxed for most of us at that fifteen percent tax bracket so there's a little bit of preferential items going on there you also could have short-term capital gains and you could also have interest and that is taxed at your ordinary income tax rate again that's the least desirable type of income that you can have now accounts that is money that you probably put in probably through like a 401k plan or an IRA account you probably took a tax deduction when that money went in to the traditional account but that money is now gonna be taxable as it comes out and again that's gonna be taxed at your ordinary income tax rate and that's your highest marginal tax rate and then the Roth is gonna be money that you put in after tax and so as long as there's a qualified distribution that money coming out is tax-free now one other thing I want to point out here is you know when we talk about how this money gets transitioned to your next generation to those beneficiaries anything that you have here in this non-retirement bucket gets at this point what's called a stepped-up cost basis okay so that means that you know if you were lucky enough to buy Apple stock at the equivalent of $20 a share in now Apple stock at the time you pass away is over $200 a share that goes to your kids and they don't pay any capital gains tax on that gain so what might be a eighty dollar per share gain completely gets wiped out and they inherit the stock as if they had bought it at the price that it was valued at at the time of your death you know so that is an advantage so as we're looking at you know what assets are going to be the best to pass on to those next generations non retirement accounts actually kind of work pretty well with that what I don't like about non retirement accounts in general is unless we do some things preemptively and we'll get into that here in this video we don't oftentimes have a lot of control over the taxes that we're paying on a year-to-year basis and that can sometimes disrupt other aspects of our retirement because if we have mutual funds or we have portfolios that are being managed a lot of times we don't have control over the dividends the capital gains whether they're long term or short term the interest that might be coming out of those accounts we don't have a lot of control over them so the traditional accounts one thing we want to think about here is obviously the taxes but we also want to think about what are called the 70 and a half rules or RMDs and so that stands for required minimum distribution and if you don't know already at 70 and a half you have to start taking minimum distributions from your retirement accounts essentially the IRS has said hey you've gone long enough without paying any taxes on this money when you turn 70 and a half you have to start taking some money up this is something I continue to get a lot of misunderstandings on with our clients and people think that they have to take it all out at 70 and a half now that's not true you just have to start taking minimum distributions the amount is actually a divisor and there's a table to it but it starts off at about 4% in the first year and then it goes up a little bit every year as you get older as your life expectancy gets a little bit shorter you have to take that money out when the money goes to your kids and the traditional account they're going to inherit that usually as a beneficiary IRA and there are some advantages to that if there are a non spouse beneficiary of that they can inherit that and they can continue to defer the taxes on that account but regardless of how old they are as a non spouse beneficiary they're going to have to take our MD so if they're 40 years old when they inherit the they're gonna do a life expectancy table for a 40 year old and they're gonna basically tell them the IRS is going to tell them how much money they have to take out of that account but the good news is that they can continue deferring those taxes over time and though those assets I should say over time and delaying the taxes may be well out into their own retirement so that is that is one advantage of that type of account now you could take the money out faster if you want so even though there's a minimum amount there's no there's no maximum amount so they could literally liquidate the whole account almost immediately if they want but that is gonna be something that's gonna be subject to tax now Roth IRAs there is no RMDs while you're alive or if it passes to your spouse so if you pass away your spouse inherits a Roth IRA there's no RMD so you can leave that money in there for your entire lifetime continuing to grow completely tax-free when that goes to your beneficiaries your beneficiaries just like the regular IRA they're gonna be forced to take RMDs that's gonna be a fairly similar schedule the difference is going to be that as those beneficiaries inherit their money then they don't have to pay any taxes as their they're taking those distributions out so those are a couple of the differences there the other thing we want to think about kind of going back over here to Social Security again I mentioned earlier you can take your Social Security benefits as early as age 62 your full retirement age we'll just say for most of us is age 67 and then you can delay as late as age 70 so you know we're not going to get too deep on the Social Security stuff in this video we've got a lot of other videos where I've taken a much deeper dive on this but one thing that you definitely want to think about as you're deciding when to take Social Security is kind of maximizing and for most clients we recommend at least getting to the full retirement age just because you do take a pretty substantial hit about 35% to take that money early at age six 62 but you also want to think about the benefits that your spouse may have so if you're let's say the higher wage earning spouse and you have let's say a pretty full benefit maybe you're entitled to 3,000 a month at your full retirement age but your spouse only has $1,200 a month at their full retirement age by delaying to full retirement if something should happen to you they're gonna be entitled to a much higher benefit so that's something again it not only helps to smooth out some of the sequences of returns that that we've just talked about but it also ensures that if something happens to you they've got a little bit more of a cushion and then for some of you you know you might even delay that to age 70 and get that benefit up even higher as it you know as you go all the way to the maximum age that you can delay your Social Security benefits and between the ages of 67 and 70 it's going to go up by 8% per year so it's a pretty it's a pretty healthy increase now let's talk just briefly about pensions again you know we could talk about the lump sum versus the the monthly amount generally my rule of thumb and this is something that's just you know just that you should definitely do a lot more research on whether to take a lump sum versus a pension but if you let's say you retire and you were planning on delaying taking income anyway or it didn't need the income for your cash flow a lump sum is something that that could make sense in that case you know or for some of you that maybe you left one job that had a pension you're still in your 50s and you have maybe 10 more years to go before you retire they offer a lump sum oftentimes because you're delaying that you can grow that lump sum again there's no guarantee with that you're still gonna have to deal with the ups and downs of the market but you could grow that lump sum and then potentially you know pull out you know a higher withdrawal amount you know let's say on a monthly or annual basis for yourself down the road and so you want to you want to think about that but again one of the other things you know we talked about creating a sustainable income which is one of the key things that we want to look at for this strategy here we want to see hey can you sustain this over a long period of time for a lot of us having that regular monthly pension is going to be one of those predictable income sources that might make a lot of sense for fitting into this overall strategy okay so now let's dive in let's really put it together let's talk about what you really to this video to see and that's how do we create the retirement withdraw strategy and thank you for bearing with me on that but it is definitely something I think that's very important to understand how all of that works not only for your tax situation right now today but also for the tax situation for your kids because you know as we're doing financial planning a lot of times as we're doing the forecasting we are seeing that for most of our clients there is some money that's going to hopefully be left behind for the next generation so so what we want to do is first of all we want to identify the cash flow and we refer to this a lot of times as the gap again that's something that I'm not getting into here in this video but that's something that we do with our financial planning that we do for individual clients where we map this out literally year by year and we can see what those cash flow gaps are if you go again to our Resource Center and you go through that workshop that'll give you some idea as what those gaps are so so basically that is what we're solving for and as we do this we're gonna have maybe a year by year and you know you might retire you know at sixty and so you might find that you know you have some gaps maybe you maybe need forty thousand and you're one maybe it's forty five thousand you know whatever 50 thousand let's just it's going up a little bit every year so that is essentially what we need to solve for and we have a couple different options you know so again if we go back up here to our sources we could say we could turn on the pension okay and again one of the things to think about there is is there any benefit to delaying that pension benefit you know so for some people we have a lot of clients that work in the automotive industry here locally and they can retire as early as age 58 and really see no difference in the amount of pension benefit that they're gonna get by collecting at age 58 versus waiting until 62 or 65 you know so if that's the case for you maybe that's something if you have a $20,000 a year pension obviously that is gonna fill a big part of that so that's going to leave your gap at maybe $20,000 a year so that's something to think about a lot of times I think a common mistake that we see people making a lot and hopefully we get to them before they make this mistake but turning on Social Security benefits at age 62 and and so they'll say hey I've got a gap here maybe I got $20,000 so I can very easily fill that gap by turning on a social security benefit and let's just you know say they're getting $25,000 a year and now they're in a $5,000 positive cash flow situation so they think they've done something really good because they're able to leave these investment accounts alone they don't have to pull any money from that and they've solved their gap issue 100% by turning on that social security benefit and it all seems like it makes sense and it could be a little scary to take money out of those investment accounts you know because for 30 or 40 years or more you've put money into those accounts every paycheck you know for a lot of you watching the video and and so to reverse that and start taking that money out can be a very scary thing so a lot of times people want to delay that so one of the things we've talked about this in other videos that that happens well first of all if you don't spend it that $5,000 is just going to go into the non retirement account so that's gonna build up that account there that's going to mean more taxes that you're going to have to pay every year because that $5,000 is going to make some interest or dividends or capital gains and and that's going to build that account up you also are going to because you're not taking money out of this traditional account the traditional and the Roth accounts are both going to increase in value so one thing that you might want to think about here again it's going to kind of do twofold one is to delay taking social security to maybe at least that full retirement age that means you're going to continue to have these gaps that you're going to have to solve from but you're going to be taking the money primarily where we would recommend for most of you is taking it from the traditional bucket now why do I say that well for one reason is because you're going to have to take the money from that bucket anyway when you turn 70 and a half so let's say that you have a million dollars in your traditional bucket and you don't take any money out of that let's say you retire at age 60 and earning a seven percent rate of return just doing some simple math means that that account is going to be two million dollars by the time you turn 70 and so figuring a 4% withdraw for an RM d if the account was at a million dollars obviously there would be forty thousand dollars but at two million dollars that number could double to eighty thousand dollars per year so by time you add in that eighty thousand dollars plus by then by seventy you're definitely going to be taking Social Security if you have a pension you're gonna be taking that and then that non retirement account has gotten bigger as well so there means they're more taxes that's behind the nutshell how people end up in a higher tax bracket in retirement than they were while they were working so so what we oftentimes recommend is taking the first set of distributions from that traditional account and in doing that for a couple reasons but number one is to reduce the value of that account and number two is to hopefully allow yourself the opportunity to see that social security benefit grow in value to give you a higher future predictable income source not only for you but also for your spouse as well if something should ever happen to you okay so hopefully that makes sense okay let's talk about a couple of other things okay so what do we do with the Roth bucket so the Roth money really should be in my opinion the last money that you ever spent okay because anything that that Roth account grows by is going to be completely tax-free so if you had a million dollars in a Roth bucket and it grew to two million dollars well there's just two million dollars more of tax-free money that either you could potentially take out or if it ends up passing on to your kids they take that out at that tax-free amount they can take the two million dollars out completely tax-free okay now the last thing I want to talk about here is the type of investments that we should be focusing on in each of these accounts okay so just to make it easy here I'm just gonna rewrite our columns here we've got the non retirement we've got the traditional and we've got the the Roth bucket okay so again we said that for most of us we probably want to focus on this column right here the traditional bucket for taking our withdrawals out initially in retirement because we want to reduce those future required minimum distributions one thing I didn't mention here very important the 2018 tax cuts that went into effect so the tax cuts in Jobs Act started in 2018 they go through the end of 2025 so we have a lot of a pretty big reduction in tax rates for most of us here over that time span in 2026 however they're going to revert back to the old rules unless Congress were to do something so that's another reason for preemptively taking more money out of this traditional bucket and what we want to do there is we want to see number one is how do we solve for that gap okay so how much do you need to take out of that but we also might want to extend that a little bit more and look at where you are in the tax bracket so for example the twenty two percent tax bracket I think goes up to about one hundred sixty eight thousand dollars a year for a married couple filing a joint tax return and if maybe taking out your gap let's say you need $50,000 to cover your gap and that still puts you in at you know like a hundred and thirty thousand dollars of of income you could take another thirty eight thousand dollars from the traditional account and still only be at the twenty two percent tax bracket so that's something we do a lot of planning with clients on to help them map that out and see where can they take that money out and what you can do is you could take that money out or what we recommend is doing a Roth conversion and converting that money from a traditional account over to a Roth account but you're taking advantage of the lower tax rates and the gap that you have in that particular tax bracket so now what types of investments do we want to have so in the traditional account if we're going to build an asset allocation we're not going to get into a lot of detail but let's just say you're doing your traditional 60/40 split I would recommend as much as possible having most of that interest earning investment income in that traditional account remember if you have it over here it's going to be taxed at your ordinary income tax rate okay so that's the highest tax rate the traditional buckets taxed at the ordinary income tax rate anyway so it doesn't really matter and in the Roth bucket we really want to have more of our aggressive investments in the Roth bucket so if you think of it you know anything that this Roth bucket makes is tax-free the more money that makes the more tax-free income we have so if we're expecting to earn a better rate of return on some of those aggressive investments it makes sense to put more of the aggressive stuff into the Roth we could still build out the overall same asset allocation but by allocating things a little bit smarter I think we could we could definitely benefit from that in the non retirement account we want to look at things like maybe dividends because those are taxed at a little bit lower income tax rate that 15 percent tax bracket if there are qualified dividends we also want to look at long term capital gains so there's some shifting that you could do there potentially and maybe we've talked about it in other videos but maybe reduce the amount of active mutual fund investments that you have that are constantly buying and selling things where you don't have a lot of control and maybe shifting that over towards ETFs which are exchange-traded funds which tend to have a little bit better tax structure on them than a regular mutual fund so again that's something to think about is you know again how do you balance out those different investments we can still get to the same outcome with having that asset allocation but paying attention to the different types of investments that are each one of those so we could take advantage of the tax advantages in each one of those different buckets so anyway there was a lot of information here in this video and instead get it all on the screen and whoa doing something crazy there but hopefully you got some valuable information out of the video here today just thinking about the retirement withdrawals the strategy that you might want to implement the tax considerations how you're gonna fill your gap how you're going to structure that over a long period of time so that you have the money available when you need to so anyway if you haven't already be sure to check out our Resource Center that's where we have some of those extra videos some downloadable worksheets that you can get access to and it's very easy to sign up and register for that it's absolutely free for you we also broadcast our live events from that page as well and then don't forget hit to hit the subscribe button or the like button share today's video and I will see you back here soon in one of our next videos Thanks have a great day

Channel: Money Evolution

Views: 538,053

Rating: 4.9029241 out of 5

Keywords: yt:cc=on, retirement income, 4% rule, 4 rule, retire early, financial planning, early retirement, retirement planning, retirement planning 2019, financial planning 101, financial independence, personal finance, retirement income planning, retirement income strategies, retirement income streams, retirement income portfolio, retirement income tax, retirement income ideas, retirement income for life, retirement income fund, financial freedom

Id: 6ZkdhMzNZTs

Length: 24min 23sec (1463 seconds)

Published: Sat Dec 21 2019