#79 – All these years, you might have been focusing on efficient ways to save your retirement money.
But when it is finally time to take it out, which accounts do you withdraw from first? When is the best time to withdraw? Does it make sense to delay Social Security and pension?
Your withdrawal plan can have a huge impact on your lifetime taxes — potentially even hundreds of thousands of dollars!
- Three areas that can generate advisor alpha
- Why building a custom withdrawal plan is far beneficial than conventional withdrawal methods
- How the Income Solver software helps you make smart, research-based decisions
- Ways to avoid the “Social Security tax torpedo”
- And more
3 Reasons to Have a Withdrawal Plan in Retirement
1) It Generates “Advisor Alpha”
By advisor alpha, we mean the “extra value” that a financial advisor can add to your retirement. According to Chris Lanfranca, this extra value can be generated in three areas:
- Withdrawal Plan
Your withdrawal decisions significantly impact your overall taxes. The more tax-aware you are while making your withdrawals, the more money you can save.
- Social Security
The time when you claim Social Security benefits depends on several factors and is different for each individual. One reason why this decision is highly personalized is that every individual has a different life expectancy. For couples, it’s important to consider the life expectancy of both spouses.
You also need to coordinate your Social Security with other accounts such as 401(k)s and IRAs. This is called distribution planning. For couples, you might also need to consider your spouse’s income.
Finally, coordinate Social Security with your taxes. As your Social Security is not 100% taxable, there is potential for you to save money in taxes with your Social Security decisions.
If you don’t know where to start with your distribution plan, think of Social Security as the centerpiece. You can base decisions related to other accounts on the expected income from Social Security.
- Investment Plan:
How often do you rebalance your portfolio? How have you allocated your assets to different investment classes? Where are you holding most of your assets?
Remember, effective rebalancing, asset allocation, and asset location can be a great source of advisor alpha.
A common mistake that we see with investment plans is that they’re either too risky or not risky enough. Getting the right level of risk is very important for investment plans.
2) It’s More Advanced Compared to Conventional Withdrawals
A conventional withdrawal sequence typically involves taking money out from one account at a time, withdrawing first from taxable sources. Some common taxable sources include checking, savings, and brokerage accounts.
Next, you start withdrawing from tax-deferred sources, such as IRAs, 401(k)s, and 403(b)s. Again, you deplete them one account at a time. Finally, you move to tax-free sources like Roth IRAs.
As you can see, the goal of the conventional method is not tax-efficiency, but simply fulfilling your spending needs over time. Here, you’re essentially applying generic rules of thumbs and not customizing the plan to suit your unique tax situation.
Ideally, before you make a withdrawal, you should consider your tax brackets, income-related monthly adjusted amount (IRMAA) thresholds for Medicare, required minimum distributions (RMDs), and several other factors. In fact, you can also factor in a potential rise in taxes in 2026 into your decisions.
The conventional method might provide instant gratification, but advanced withdrawal planning helps ensure a better outcome in the long run.
3) Leads to a Better Outcome When Combined With Retirement Planning Software
You can use either a standard financial planning software or a retirement planning software.
The standard financial planning software is usually more descriptive, and it is based on general rules of thumb related to investing math.
It is a great tool to answer questions about a model portfolio, or perhaps how aggressively you want to grow your wealth.
On the other hand, retirement planning software is often prescriptive, and it is based on research related to retirement spending math. This software differentiates between the accumulation phase and the decumulation phase of retirement, and helps find solutions accordingly.
Distribution planning is a key component in utilizing retirement planning softwares. Although you can never achieve 100% certainty, you can strategically plan for your retirement goals.
Income Solver is a great comprehensive retirement planning software. Feel free to check it out.
Pro-tip: Beware of the Social Security Tax Torpedo
When you are withdrawing from certain qualified plan distributions such as 401(k)s alongside your Social Security benefits, you may end up having an increase in your total taxes — the result of a tax torpedo.
Why? Because this increases your provisional income level. The formula for the provisional income level includes half of your annual Social Security benefits, plus withdrawals from the plan distributions.
In other words, even though your 401(k) has nothing to do with Social Security, you’re still “torpedoing” yourself with an increased Social Security taxation by simultaneously taking money out of 401(k)s and Social Security.
Do you want to learn more about tax-efficient withdrawal strategies? Check out the resources below!
If you have any questions, feel free to contact us or our guest Chris Lanfranca using the information provided below!
- “Income Strategies: How to create a tax-efficient withdrawal strategy to generate retirement income.” by William Reichenstein
- 3 Things You Should Know Before Choosing A Financial Advisor
- 6 Questions Retirees Aren’t Asking But Should Be
- Subscribe to Retirement Revealed on Google Podcasts
- Subscribe to Retirement Revealed on Apple Podcasts
Connect With Chris Lanfranca:
Connect With Jeremy Keil:
- (262) 333-8353
- Send Us Your Questions
- Keil Financial Partners
- LinkedIn: Jeremy Keil
- Facebook: Jeremy Keil
- LinkedIn: Keil Financial Partners
- Book a call with Jeremy
Results and figures presented within the above links are hypothetical, unaudited, and are intended for illustrative purposes only.
Keil Financial Partners assumes no liability, or responsibility for any errors, omissions, or other issues with the links and their respective contents. This includes both the website content and any potential bugs, viruses, or other technical threats.
No Tax Advice
Keil Financial Partners does not provide any tax advice. No information or results from the links should be interpreted as tax advice. Please seek guidance from a qualified tax professional for any and all tax-related matters.
No Investment Advice
The content and information provided through the links should not be interpreted as being investment advice or a recommendation of suitability for any particular security, portfolio of securities, transaction, or investment strategy, or related decision. Please seek assistance from a qualified investment professional for any and all investment matters.
Investments may increase or decrease significantly. All investments are subject to risk of loss
Listen to Retirement Revealed on:
Download your retirement planning guide now.