How to Pick a Tax-Wise Retirement Withdrawal Strategy With Daniel McDonald

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Summary:

[146] – Are you overlooking taxes in your retirement plan?

Many individuals fail to recognize the substantial role taxes play in shaping their retirement budgets.

In this episode, Jeremy Keil discusses tax-wise retirement withdrawal strategies with Daniel McDonald, author of From Savvy Saver to Smart Spender. Dan shares his personal experience of facing retirement and realizing the importance of considering income taxes in retirement budgets. They discuss the impact of taxes on retirement expenses and the need to plan for them. They also touch on the transition from being a saver to becoming a spender in retirement.

Daniel discusses:

• What it’s like to face a situation like retirement when you don’t feel prepared for it
• What new and interesting discoveries he made while researching tax-wise retirement withdrawal strategies
• What his retirement tax simulator is, and how you can use it
• What it’s like to go from a savvy saver to a smart spender
• What the conventional wisdom approach is, and why other retirement tax planning approaches are better
• How people should approach making their Social Security decision
• And more

How to Pick a Tax-Wise Retirement Withdrawal Strategy

What Is The Transition Into Retirement Like?

The transition into retirement can be uncharted territory, filled with a mix of excitement and uncertainty. After dedicating several decades to a successful career, the moment of retirement arrives, and it’s a unique experience that one has never encountered before.

There is a sense of needing to act like you’ve been in the end zone before, even though this particular end zone is unfamiliar. While saving for retirement may have seemed relatively straightforward in hindsight, the real challenge lies in navigating the transition itself.

It’s akin to being at the top of a rollercoaster after ascending for 30+ years. You’re unsure of what lies ahead, and even if you’ve extensively contemplated retirement, the perspective shifts when you’re actually standing at the precipice. Many individuals tend to let retirement happen to them, following the crowd’s lead or waiting for specific milestones like Social Security or required minimum distributions. However, it’s about embracing the newfound control over your financial future and making the most of this unique phase of life. 

Why Are Taxes Important To Consider When Creating A Budget For Retirement?

When creating a retirement budget, it’s crucial to consider the impact of income taxes.

Unfortunately, many budget templates overlook the significance of taxes in retirement planning. However, taxes can often be one of the top three expenses in retirement, alongside housing and healthcare costs. It’s essential to account for income taxes when estimating your retirement budget, as they can have a substantial impact on your financial situation. 

While typical budgeting tools like Quickbooks.com or Mint.com may not accurately factor in taxes, it’s important to recognize that retirement taxes differ from those during your working years. With strategic planning and thoughtful withdrawal strategies from tax-advantaged accounts like IRAs and 401(k)s, you can optimize your tax outcomes in retirement.

To navigate the complexity of retirement taxes, utilizing resources like the Retirement Tax Saver can be invaluable. This simulator, mentioned in the book “From Savvy Saver to Smart Spender,” by Daniel McDonald, allows you to simulate and assess the tax implications of various retirement income sources, including Social Security.

By leveraging tools like the Retirement Tax Simulator, you can gain valuable insights and make informed decisions to optimize your tax planning for a better retirement outcome.

How Can I Go From Being A Savvy Saver To A Smart Spender?

Transitioning from being a savvy saver to a smart spender can be challenging. After years of diligently saving and treating your accounts as a secure lockbox, it may feel difficult to start withdrawing from those funds. Unlearning the habit of saving and adjusting to the spending mindset can take time.

Although it might seem easy to indulge and enjoy your hard-earned money, there’s also a lingering voice reminding you to preserve what you’ve built. For some people, the transition isn’t straightforward. They continue to save even during retirement, sending funds back into their accounts alongside their withdrawals. This unique approach allows them to feel comfortable and maintain the practice of setting money aside for unforeseen circumstances. It may sound unusual, but it serves as a reminder of the saver’s mindset that they have nurtured for decades.

Shifting from being a savvy saver to a smart spender is a significant mental adjustment that happens suddenly. To prepare for this shift, it can be helpful to find a balance that works for you—keeping a touch of the saver mentality while embracing the role of a spender. It’s important to remember that being a savvy saver isn’t only about saving for the future; it’s also about getting the most out of your money and stretching every dollar.

By implementing a tax-wise retirement withdrawal strategy, you can continue to stretch your savings and make the most of your hard-earned funds. This approach appeals to savers who want to be strategic and thoughtful, maximizing their financial resources even as they transition into the spending phase of retirement. After all, you’ve worked hard to accumulate your wealth, so it’s crucial to be deliberate and thoughtful as you navigate the final stretch toward retirement.

What Is Conventional Wisdom, And Is It The Right Retirement Withdrawal Approach For Me?

Conventional wisdom suggests that individuals should delay withdrawing money from their retirement accounts until they reach the required minimum distribution (RMD) age and then withdraw only the minimum amount mandated by the IRS. The rationale behind this approach is to take advantage of tax-deferred growth and preserve the funds for as long as possible.

However, conventional wisdom may not always be the best approach. By waiting until the RMD age, individuals may find themselves in higher tax brackets due to factors such as increased income, changes in marital status, or the taxation of Social Security benefits. A different approach is to start withdrawing funds before the RMD age, particularly during years when you are in lower tax brackets. By doing so, you can potentially reduce your lifetime tax bill and take advantage of tax-efficient strategies like Roth conversions.

Implementing this change does not require purchasing new investments; it simply involves transferring funds from traditional retirement accounts to Roth IRAs within the same financial institution. It is important to note that individual circumstances may vary, and it is advisable to seek personalized financial advice to determine the most suitable retirement withdrawal strategy.

How Should I Go Approach Making My Social Security Decision?

When approaching the decision of when to claim Social Security benefits, several factors come into play. It’s important to consider your tax situation and how it relates to your retirement savings. Even if you don’t have a significant amount of money in tax-deferred accounts, the withdrawals from these accounts can have a substantial impact when it comes to triggering Social Security taxes. So even with a moderate amount of savings, you should be mindful of the potential tax implications.

Using a calculator like Daniel McDonald’s Retirement Tax Saver is a great idea! Simply being in a specific tax bracket doesn’t mean that every decision you make will fall within that bracket. Understanding the marginal rate is crucial. For instance, moving from the top of the 12% tax bracket to the bottom of the 22% bracket can happen with a relatively small increase in income. It’s essential to evaluate the marginal rate when making your decision.

Social Security benefits can act as a multiplier in terms of taxes. Withdrawals from traditional retirement accounts can push a portion of your Social Security income into a taxable category. This multiplier effect means that a $1,000 withdrawal could potentially increase your taxable income by $850, resulting in a higher tax rate. For individuals considering Roth conversions, it’s essential to assess the total cost, considering both the income from Social Security and the conversion itself. For example, if you prefer to limit conversions to the top of the 12% tax bracket on Social Security, you might find yourself paying a higher rate, such as 22%. If the conversion makes sense at a higher cost, it may be worth continuing into the 22% bracket.

When deciding when to begin claiming Social Security, it’s wise to view it as old age insurance. Consider maximizing your benefits by waiting until age 70, especially if you prioritize a more secure financial future. In the meantime, bridge the gap between retirement and age 70 by using funds from your traditional retirement accounts. By doing this, you can take advantage of the three-year period between ages 67 and 70, during which your Social Security benefits will increase by 24% annually. This approach ensures a higher monthly benefit for the rest of your potentially long and fulfilling life.

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To learn more about tax-wise retirement withdrawal strategies, check out the resources below!

If you have any questions, feel free to contact us or our guest, Daniel McDonald, using the contact information provided below!

Resources:

• Mint.com
• Quickbooks.com
• Retirement Tax Saver
• Retirement Revealed: Your 5 Step Gameplan to Lower Your Lifetime Taxes with Brian Haney
• Retirement Revealed: Social Security
• From Savvy Saver to Smart Spender by Daniel McDonald
• Free Retirement Planning Video Course: 5stepretirementplan.com
• 3 Things You Should Know Before Choosing A Financial Advisor
• 7 Questions That Could Make or Break Your Retirement
• Subscribe to Retirement Revealed on Google Podcasts
• Subscribe to Retirement Revealed on Apple Podcasts

Connect With Daniel McDonald:

• Retirement Tax Saver
• LinkedIn: Daniel McDonald
• LinkedIn: RTS Tech Publications LLC

Connect With Jeremy Keil:

• 262-333-8353
• Keil Financial Partners
• LinkedIn: Jeremy Keil
• Facebook: Jeremy Keil
• LinkedIn: Keil Financial Partners
• YouTube: Retirement Revealed
• Book a call with Jeremy

About Our Guest:

Daniel McDonald is a semi-retired intellectual property lawyer, author of From Savvy Saver to Smart Spender, and creator of the retirementtaxsaver.com website. Dan has a B.S. in Electrical Engineering and a law degree, both from the University of Minnesota. Dan has been an attorney for over 36 years, admitted in Minnesota, Georgia, and various federal district courts, appellate courts, and the U.S. Supreme Court. He is also a registered patent agent authorized to practice before the U.S. Patent and Trademark Office.

Recognized for many years as a SuperLawyer® and U.S. News and World Report Best Lawyer®, Dan has successfully presented and defended against dozens of multi-million-dollar patent, trademark and copyright claims. He has volunteered in many roles at the University of Minnesota, including Chair of the Alumni Association, receiving the University’s Alumni Service Award. Dan currently resides in Naples, Florida and enjoys bicycling, kickboxing, and travelling with his wife, Kim.

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