Market Beat: Retirement income strategies |

Market Beat: Retirement income strategies

Ken Roberts
Market Beat

There are several things to consider when planning your retirement income. One is to determine how much you’ll withdraw from your accounts each year. Another thing to consider is which accounts you’ll withdraw from, and in what sequence to maximize tax efficiency.

One common withdrawal strategy is known as the 4 percent rule. The way the 4 percent rule works is fairly simple. In the first year of your retirement you withdraw 4 percent of your portfolio.

In the subsequent years you add an inflation factor based on the consumer price index or CPI. Adding the inflation factor every year will help maintain your purchasing power. The 4 percent rule is for people who want to preserve their principal for their beneficiaries and just live off the income their investments produce.

Another factor to consider is which accounts you’re going to withdraw from. Many retirees have multiple accounts with different tax consequences. It’s important to plan your distributions to minimize your taxes.

Retirees over the age of 70 years, six months should consider taking their distributions in this order. First, withdraw enough to meet your required minimum distributions or RMDs from your qualified retirement accounts. Once your RMDs have been met, then take funds from your taxable accounts. Next, withdraw more from the traditional qualified accounts, and finally withdraw from your Roth accounts if you have any.

This sequence will preserve your tax-qualified accounts for as long as possible. Under current tax law, Roth IRAs are not subject to mandatory distributions unless it’s an inherited IRA.

In the event you have other sources of taxable income in a given year, like the sale of real estate, you might want to plan your income distributions to keep you in the lowest tax bracket possible. In a situation like that it could make sense to withdraw from the Roth before taking more from your traditional IRA.

Next, you might want to withdraw from your taxable account prior to the traditional IRA, because withdrawals from the traditional IRA are subject to income tax, while you may just have to realize some capital gains to withdraw funds from your taxable accounts.

A similar strategy to managing your distributions to keep you in the lowest possible tax bracket is to factor in your social security benefits. Up to 85 percent of your social security income is taxable. Your retirement distributions can be planned to minimize your social security tax.

Having multiple account types can provide some future planning flexibility.

Kenneth Roberts is a Truckee-based Registered Investment Advisor. Information is at his blog at or 775-657-8065. The mention of securities should not be considered an offer to sell or solicitation to buy investments mentioned. Consult your investment professional to understand the risks and/or how the purchase or sale of these investments may be implemented to meet your investment goals. Past performance is no guarantee of future results.

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