The Best Retirement Withdrawal Strategies - YouTube

Let's talk retirement it's time to enjoy all  those bucket list items that you didn't get to do  

while you were working you saved  in your company retirement plan  

have some additional income streams like  maybe social security or a pension or  

annuity or some rental income but now that  your paycheck will soon be turned off how  

exactly should you withdraw assets to use  during retirement well this is a complex  

question and every situation is different but  if you stick with me I'll explain the optimal  

strategies for generating retirement  income and what not to do stick around

it's Colin Exelby here and I provide financial  planning for business owners and their families  

that makes sense by helping you  see the forest through the trees  

I'm the owner of a virtual financial advisory  practice Celestial Wealth Management and 

I provide advice to families all over the country  part of that advice is retirement income planning  

how do you turn these assets you accumulated  into the most efficient retirement income stream  

possible numerous studies have shown that with  a little thought preparation and analysis you  

can extend the life of your portfolio increase  your distribution rate or pass on more wealth to  

your heirs i'm going to talk about withdrawals  from three types of accounts taxable accounts  

tax deferred accounts and tax-free accounts  now taxable are non-retirement accounts where  

you've already been taxed and your only taxes  would be capital gains when liquidating assets  

tax deferred are retirement accounts where  you received a tax deduction up front  

and you will owe income taxes when you  distribute those assets these accounts  

are typically traditional or rollover IRAs SEP or  SIMPLE IRAs 401(k)s or 403(b)s all right tax-free  

assets are assets where there aren't capital  gains or income taxes when you distribute them  

these are typically a Roth 401k or a Roth IRA  account where contributions were initially taxed  

but growth and distributions are not taxed  when you would draw them as long as the  

account is open for at least five years  and some simple age restrictions are met

okay the first step to figuring out how to  distribute assets is to figure out how much  

you need annually to live on after taking into  account any other income sources so what do you do  

first figure out your total retirement need  after taxes of course and then subtract  

any after-tax income flows that you have  like social security pensions rental income  

and annuity payments the remainder is the  amount that's needed for retirement withdrawals  

typically once you retire distributions are  made from a combination of those three types of  

accounts the goal of retirement income planning is  to maximize after tax distributions you want to be  

mindful of your tax brackets throughout retirement  and both at the federal and the state level  

currently there are 12 states who do not tax  distributions from retirement accounts or pensions  

if you are considering a move in retirement a  state without retirement income taxes could be a  

major help to your portfolio nine states don't  currently levy any state taxes and another  

three don't tax retirement distributions  alabama taxes 401(k)s and IRAs but doesn't  

tax pensions for a list of states that don't tax  retirement income just check out the notes below  

all right to analyze your federal and state income  tax rates the first step is to project your income  

levels and then use software to project your  tax rates taking into account tax credits and  

deductions ideally you want to be very mindful of  the points where the tax brackets jump up there  

are certain income levels where the marginal tax  rate increases meaning your retirement income is  

taxed at different rates depending upon how  much total income you have all right let's  

take a look at five strategies for withdrawing  assets and who might typically use them for each  

of these strategies it's important to know the age  limitations and withdrawals and whether penalties  

apply to you in most cases paying penalties  for early withdrawals is the worst strategy the  

government created these plans and gave incentives  for you to save for retirement don't blow up these  

benefits in early withdrawal penalties if you  need distributions prior to the appropriate age  

there are additional strategies that may limit  the impact of those penalties let's dive in  

the first strategy is what i will call the  baseline income strategy it typically is the least  

tax efficient but often it's the easiest one to  employ it's called pro rata and means that you  

equally distribute assets from your taxable  your tax deferred and your tax-free accounts  

for example let's say you need six  thousand dollars per month to live on  

after your other income sources have been used the  pro rata strategy would be to take two thousand  

dollars each from your taxable account your  tax deferred account and your tax-free account  

if your investment strategy is to hold the exact  same asset allocation in each type of account then  

as you would draw assets your asset allocation  stays consistent over time the assumption is that  

by withdrawing equally from each type of account  you diversify your tax burden over time this  

strategy is ideal for someone who would not change  marginal tax brackets based on distributions on  

the surface this isn't a bad strategy if you don't  know what to do don't wish to do deeper analysis  

or don't really have a desire to pass along  assets strategy number two i'm going to call  

this the taxable pro rata this means distributions  are funded with the taxable account first until it  

is completely depleted then distributions  are funded equally by the tax deferred  

and the tax-free accounts this strategy typically  keeps tax rates lower in the early years because  

the only taxes you're paying are on capital  gains from the investments not any principal  

distributions from the retirement accounts this  also allows the tax deferred and the tax-free  

accounts to grow without taxes for a longer period  of time this strategy could be ideally employed  

by someone with a larger taxable account in  smaller retirement accounts the downside with this  

strategy is that you may be exchanging lower tax  rates now for future taxes at much higher rates  

depending upon how large the distributions  are and what the heck future tax rates are  

all right strategy number three is to use tax  deferred accounts first followed by the taxable  

and then finally tax-free this strategy  aims to keep the tax-free assets growing  

as long as possible and more evenly spread the tax  obligation over time typically in the early years  

of retirement or if you retire early your income  levels are much lower than while you were working  

using tax deferred assets first capitalizes on  the fact that while your income is lower usually  

before mandatory retirement distributions take  effect and potentially before receiving social  

security you can distribute assets that will  be taxable and still stay in a lower marginal  

tax bracket this strategy could be ideal for  someone who retires early with a large amount in  

tax deferred retirement assets like in the IRA or  401(k) and having smaller amounts in taxable and  

tax-free accounts especially if those assets are  invested in higher growth areas it allows those  

assets to grow for a longer period of time before  liquidation and then liquidation could be at lower  

tax rates strategy number four is to distribute  taxable assets first then tax free assets  

and finally tax deferred assets this strategy  is designed to defer the largest amount of tax  

for as long as possible and this strategy would  be ideal for someone who either has a shorter life  

expectancy maybe due to some medical condition  or some family issues or someone with a larger  

tax-free and taxable account by distributing  taxable assets first of course you only pay  

capital gains taxes and you defer the larger  income taxes from tax deferred distributions  

so far into the future that you may not even  be distributing them at all before passing away  

the fifth strategy is to use taxable assets  first then tax deferred and finally tax-free  

now by default this is the most often used  retirement income strategy and intuitively it  

makes sense especially if your asset allocation  is aligned meaning your investments across the  

different accounts are aligned first allow your  tax-free roth assets to grow as long as possible  

you'll want to distribute all your taxable assets  first where only capital gains taxes are paid  

you next would withdraw all your tax deferred  assets this is when you would most likely be in  

your highest marginal income bracket in retirement  and finally when all of those other assets are  

gone then you distribute your tax-free roth assets  this strategy would be ideal for someone with  

larger taxable assets who desires to pass on  assets to their heirs because tax-free roth  

assets are often the most desirable assets  to pass on because of their tax-free nature  

the problem with this strategy is that in your  early retirement years when your income is  

often the lowest you're not taking advantage of  those low marginal tax rates you often end up in  

much higher tax brackets than needed in the years  when you're distributing your tax deferred assets

so what's the ideal strategy in my opinion the  ideal strategy is to be fluid not rigid look tax  

rates change your distribution needs change we all  make assumptions but we don't know what's going to  

happen in the future and market conditions change  i'm a big believer that maintaining flexibility  

makes a lot of sense in my experience retirees  often spend the most in the early years of  

retirement you do all those things that you wanted  to do and you didn't have the time and you pay  

a lot of expenses in the later years when health  care costs are significant both in the home and if  

you need additional care the years in the middle  are often when you have lower spending needs  

because retirement spending isn't often a straight  line your withdrawal strategy should reflect those  

changing needs i firmly believe that based on much  analysis that attempting to maintain a consistent  

income tax rate throughout retirement rather  than lower and then higher later on makes a lot  

of sense the most tax-deferred assets that you  can distribute in the early years of retirement  

at lower tax rates the better even if you don't  need the assets right away they could potentially  

be reinvested in tax-free roth accounts through  a conversion or in a taxable account where only  

the capital gains taxes would be due or maybe  some combination of both this is a strategy that  

many people miss out on i see it all the time they  miss out due to the desire to delay taxes as long  

as possible and this creates potential tax bonds  in retirement accounts and if tax rates increase  

in your retirement you could be in for a rude  awakening these are the most common distribution  

strategies but they're not the only ones every  family situation and their needs are different  

and this should not be construed as specific  advice thankfully nowadays powerful financial  

planning software exists to examine each of these  strategies as it relates to your own situation  

and determine the best course of action currently  in my practice i use some incredible software  

from RightCapital that helps me analyze this  with my clients if you're getting close to  

retirement and wish to analyze your withdrawal  strategies feel free to reach out to me at my  

website celestialwm.com or speak with your trusted  advisor if you enjoyed this video just hit that  

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