Below are a few excerpts from my recent article published on the Pepperdine Business Blog. I hope you find these tips helpful when developing your retirement drawdown strategy, whether you are nearing or already in retirement.
Sources of Retirement Income
Your retirement income will differ in several ways from your working income. For many retirees in the U.S., social security will provide a “base” of income, and starts between ages 62 and 70. Since the U.S. government keeps track of life expectancy, it is not surprising that retirees will receive smaller monthly social security payments if they begin drawing down social security at a younger age. So, one drawn strategy could be to delaying social security until age 70, which can provide more income if the retiree expects to significantly outlive their peers.
To supplement social security, many retirees also employ a drawdown strategy to their taxable, tax-deferred (e.g. 401(k)s) and tax-exempt accounts (e.g. Roth IRAs). The Common Rule is the most common strategy, that begins by taking Required Minimum Distributions (RMDs). Then, the Common Rule draws funds from one account until no assets remain. This strategy then moves to the next account
Your heir’s tax rate
Extending portfolio longevity or increasing your heir’s inheritance requires some thought to your heir’s tax rate. Why? Tax-deferred accounts are more valuable when drawdowns occur at lower tax rates. So, if your heirs expect to have a high amount of taxable income, then it is usually more tax-efficient for you, the retiree, to draw down the tax-deferred account each year up to, but not exceeding, your heir’s tax rate. This drawdown strategy, which includes an assumption of your heir’s tax rate, is embodied in our free online calculator.
June 2021 ETFMathGuy Portfolios
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