How it works
Retirement comes with a lot of complicated decisions which play an important role in managing your retirement income.
Each of the components of your retirement income and spending can be coordinated to make sure you’re getting the most from what you’ve saved.
To learn more about each component and why it matters to your retirement income, click on the topics within the grid below.
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Withdrawal Strategy
Determine what to “sell” or “tap” to generate income.
Withdrawal Strategy
Determine what to “sell” or “tap” to generate income.
Withdrawal Sequence
What is it?Withdrawal sequence is about how you should “tap” your retirement savings. It is identifying the proper order, appropriate account, specific holding and the right amount to liquidate from the assets you hold in your 401k, Traditional IRA, Roth, Annuity, CD’s etc…. There may be significant advantages to tapping more than one account at a time.
Why does it matter?
Not all retirement savings accounts are treated the same from a tax perspective. They may be “tax exempt”, “ tax deferred” or “taxable”. Your taxes will be impacted in different amounts based on how much and when you drawdown from these different accounts. You may benefit from tapping multiple accounts and specific holdings in those accounts.
How do people get it wrong?
Unfortunately, some people will draw from whichever account, whenever they want and ignore the implications – we call it the “Willy Nilly” strategy. Others may rely on a financial advisor who defaults to “conventional wisdom” which suggests you should tap and fully liquidate in this order: 1. Taxable 2. Tax Deferred 3. Tax Exempt. Sadly, this will expose the retiree to significant and unnecessary tax exposure. You can do better.
Coordination
What is it?
Coordination is a more holistic approach to generating an income stream in retirement. It is about the interplay between your Social Security benefits and your retirement assets and Medicare. Rather than thinking about each independently, a retiree can develop a strategy that maximizes the benefits in a tax-advantaged manner.
Why does it matter?
It is easy to “torpedo” your Social Security benefits or increase your Medicare premiums when drawing down income. If you only focus on the investments you liquidate, your withdrawal could the increase the amount of taxes or higher premiums you pay. Properly coordinating your withdrawals will ensure you are minimizing the amount you will pay in retirement. The less you payout, the longer your retirement assets will last.
How do people get it wrong?
Most individuals, and many financial advisors do not fully consider the implications of a weaker strategy that independently considers the retiree’s savings, Social Security benefits, and Medicare premiums.
Dynamic Updates
What is it?
Life is dynamic. Your situation is constantly changing and your strategy should as well. Dynamic updates is the opposite of the more common “set it and forget it” planning approach. It is about considering the many changes in your situation throughout retirement and making sure your strategy stays up to date. Our software does the work for you by helping you monitor your situation, and then telling you what actions you should take to get back on track.
Why does it matter?
Retirement can last many years and it is unlikely the original plans will be relevant much past the first year of retirement. You have to be flexible and your assumptions may need to be altered. Overlooking a critical change in your situation will bring additional risk of getting off track and possibly running out of money in your lifetime. Being attentive, and in some cases taking action, based on critical changes in the market, the mix and value of your investments, and your income needs is critical to a successful withdrawal strategy.
How do people get it wrong?
Few people actually construct a plan for income in retirement. Those that do one themselves, or create a plan with the help of an advisor may believe it is a one-time effort. In reality, you must continually revisit your assumptions, update your profile and re-evaluate your income strategy.
Roth Conversion
What is it?
If you have a Traditional IRA, you can convert part or all of the account to a Roth IRA. You pay taxes as if you withdrew the entire amount converted, but without any penalty for early withdrawal; in return, the money will grow tax-free in the Roth IRA, and you will not pay any tax on that withdrawal if you meet the Roth IRA distribution rules.
Why does it matter?
The benefit of a Roth conversion depends on your current tax bracket as well as your expected tax bracket. If your current tax bracket is lower than it will be in the future, it may make sense to do the conversion now. Paying less taxes means you get to keep more of your money.
How do people get it wrong?
Retirees may not realize their sources of income may increase the later years of retirement and suddenly push them into a higher tax bracket. For example, if you delay Social Security until age 70 and you have to start taking the Required Minimum Distribution (RMD) from your traditional IRA at 72, your income in retirement may now exceed the level of income you had in the earlier years of retirement. It would have been a missed opportunity to convert to a Roth in the years the income bracket was lower.
Income Management
Generate cash to live on while managing your risk.
Income Management
Generate cash to live on while managing your risk.
Asset Allocation
What is it?
Asset allocation is how you divide your investments between different asset classes (i.e. stocks, bonds and cash). It is an investment strategy that aims to balance risk and reward by maintaining a portfolio according to an individual’s risk tolerance. Once you retire, you are not “accumulating” assets, but are now “decumulating”. This will affect your asset allocation.
Why does it matter?
Retirement requires a totally different approach to asset allocation. The allocation of your assets in your portfolio should match and constantly adjust to your situation and tolerance for risk. As you “decumulate” your nest egg, your withdrawals will impact your asset allocation if you don’t actively manage it. It is also important to look at the assets at the total household level versus looking at the allocation of each individual account.
How do people get it wrong?
Retirees, for example, may ignore the impact of withdrawals on their intended asset allocation. As they draw income from their portfolio, they may end up with too much in bonds in their portfolio, which can undermine their income potential. Similarly, retirees may be assuming too much risk by being heavily concentrated in equities or high risk bonds. A smart strategy will tell you specifically what you need to sell or buy to return your portfolio to the right allocation.
Asset Location
What is it?
Asset location is not only about thoughtfully placing your retirement savings in the right type of accounts, but also where and when you withdrawal from these accounts in retirement. Examples may include “tax-deferred” (i.e. 401k, IRA, etc..), “tax-exempt” (Roth IRA) or “taxable” (i.e. savings, brokerage, etc…). Similarly, some investments are more tax-efficient (tax-free municipal bonds) than others.
Why does it matter?
You can minimize your tax liability each year in retirement if you know which holding and which account you should liquidate for income. A smart strategy considers not only the security, but also the types of accounts you have. In addition, retirees may consider putting their most tax-efficient investments in the taxable accounts and the least tax-efficient in a tax-deferred account.
How do people get it wrong?
Some may have a large percent of tax-inefficient investments in their taxable accounts. Others may overlook the benefits of using a Roth IRA and miss an opportunity to have another critical income source in retirement. Retirees should also consider the location of assets based on the household, not just the account level.
Rebalance
What is it?
Rebalancing is about adjusting your portfolio to a preferred level of asset allocation after market conditions or income withdrawals take the portfolio “out of balance”. Rebalancing involves buying or selling some of your holdings to return the portfolio to the desired allocation. Retirees are in the “decumulation” phase and must carefully manage their asset allocation when they make a withdrawal.
Why does it matter?
In retirement you must be more diligent about your portfolio. Without a periodic rebalancing effort, your portfolio will eventually stray from your preferred asset allocation strategy, thus increasing your level of risk or reducing the amount of income you want to generate in retirement.
How do people get it wrong?
Retirees may neglect this important step and get off track from their plan because their portfolio is no longer in balance. The right income strategy includes rebalancing at the household level and ensures asset location and allocation are appropriate for the retirees risk tolerance.
Tax Minimization
What is it?
Tax minimization is about making smart decisions to reduce your exposure to taxes throughout retirement so you can keep more of your money. This can include the timing of both income and expenditures, selection of investments, types of retirement accounts, as well as taking advantage of capital gains/losses.
Why does it matter?
Each time you liquidate a holding it can become a taxable event. Paying taxes is inevitable, however retirees have to be highly sensitive to the many ways taxes can divert the income needed in retirement. The more taxes you pay, the more cash you will need to pull from your retirement savings, putting you at risk of running out of money.
How do people get it wrong?
Retirees can overlook opportunities to reduce the tax burden by evaluating multiple strategies to generate income. Financial advisors don’t always focus on the tax impact of a retiree’s withdrawal strategy or may lack the expertise. Using the computing power of software will help you assess thousands of different strategies before identifying the best option.
Key Elements
These elements are included in your assessment and ongoing management.
Key Elements
These elements are included in your assessment and ongoing management.
Social Security
What is it?
Social Security optimization is considering multiple options available and then deciding the best strategy for claiming your (and your spouse’s) Social Security benefits during retirement. The rules are voluminous and, at times, hard to interpret.
Why does it matter?
Social Security is the largest retirement asset for most people. If retirees take an overly simplistic approach to claiming Social Security benefits, they can leave a lot of money on the table. Some strategies can generate up to $100,000 in additional benefits.
How do people get it wrong?
Most people don’t do the analysis or know what options they have for claiming Social Security. These assume claiming early is the best choice. Many people simply claim their benefits when they retire versus adjusting their claim based on careful consideration of the rules, as well as the impact of their benefits on taxes and Medicare premiums. A smart income strategy “coordinates” your Social Security benefits with your drawdown and Medicare premiums.
Medicare Premiums
What is it?
A retiree’s monthly Medicare premium can increase 2000% if they don’t carefully consider the impact of their income strategy on their income. There are set income thresholds that will trigger higher Medicare premiums and retirees can avoid this with a smarter strategy.
Why does it matter?
Pay less, keep more. Even the smallest increases in monthly Medicare premiums can add up over a long retirement. A proper income strategy will keep your Medicare premium costs lower. Retirees may adjust the level of retirement income they drawdown so they don’t exceed the income thresholds, thus avoiding increased Medicare premiums.
How do people get it wrong?
Retirees and advisors may neglect the impact of the Medicare premium increase that results from an increased income. Your income strategy in retirement should be carefully coordinated with the benefits of Social Security, along with the Medicare premiums a retiree is likely to pay.
Healthcare Spending
What is it?
Out of pocket healthcare costs will account for a significant portion of expenses in retirement, particularly in the later years. It is a future liability and should be planned for when determining your income strategy for retirement.
Why does it matter?
Rising costs in healthcare combined with the natural aging process can make this a significant determinant of how long your money will last in retirement. In home or nursing home care for elderly or disabled retirees can be very expensive. Most types of insurance do not provide coverage for such care, so that impacts how long retirement savings will last. Funding a Health Savings Accounts (HSA) or purchasing Long Term Care (LTC) Insurance are two simple ways a retiree can mitigate some of this risk.
How do people get it wrong?
Most people don’t plan for healthcare expenses when considering their withdrawal strategy. Your medical expenses in retirement is like a future liability. Retirees should consider saving some of their assets they hold in a tax-deferred account to offset the anticipated healthcare costs in the later years.
Variable Spending
What is it?
Spending is one of the more controllable variables that retirees can manage throughout retirement. Variable spending is about acknowledging that your spending will likely fluctuate month-to- month and throughout the stages of retirement. Whether it is the planned spending related to travel in the early years or unexpected medical costs in the later years, retirees will benefit from continually adapting their spending habits during retirement.
Why does it matter?
Changes in spending affect your withdrawal strategy. If you are caught off guard by an unplanned expense or life throws you a “curve ball”, you should know exactly where and when to liquidate a particular holding to generate the income you need. Similarly, if the market takes a downturn, you can temporarily reduce your spending so you can prevent from liquidating holdings during a down market.
How do people get it wrong?
Many people do not adapt their spending level based on the changes in their situation or plan. Some retirees may be too conservative and miss opportunities to enjoy retirement because they are afraid of running out of money. Others spend as they did when they had a paycheck rolling in every month. “Getting cash” from your investments requires a smarter strategy on spending too.