Strategies for Withdrawing Assets in Retirement

Preparing for a financially stable retirement is similar to running a marathon. For years, you’ve had your focus on accumulating savings, with the primary goal of saving as much as possible while enduring market fluctuations. During this accumulation phase, the spotlight shines on one simple task: contribute as much as you can to your accounts so you can cross the finish line to retirement. 

However, your financial picture can become more complex in the next stage of life, known as decumulation. This phase involves strategically spending down savings to generate income during retirement, with the goal of living a comfortable retirement without depleting your funds. Decumulation comes with new tax regulations, financial decisions, and, for some, heightened anxiety about preserving their financial independence. 

In my experience, many people can manage the accumulation phase without outside help because it’s relatively clear and straightforward. However, the decumulation phase comes with a different challenge that often requires additional support and guidance. In this article, I explore 7 traps and pitfalls in the decumulation phase so you reach a carefree, satisfying retirement.

1. Navigating Taxes in Retirement

In the decades of working and accumulating assets, your taxes mainly revolved around how much you and your spouse made in your careers and utilizing any credits and deductions to lower the amount. But there’s a lot more to consider in retirement, and each decision affects other decisions. For instance, are your investments diversified by account type? 

In other words, do you have the right balance between tax-deferred accounts (like a 401(k) or IRA) and tax-free accounts (like a Roth IRA)? If not, maybe you should consider a Roth conversion, where you convert a portion from a tax-deferred account into a Roth IRA. However, if you do this, it will not only impact your income taxes in the current year, but it could also affect how much you pay in Medicare payments, as well as how much tax you pay on your Social Security benefit.

And that is just one tax issue! Other issues with tax implications include which account to distribute money from, when to claim Social Security, how to prepare for and handle required minimum distributions (RMDs), and more. There are a lot of moving parts for your tax situation in retirement and with one mistake or overlooked decision, you could get an unexpected tax bill which could also lessen your retirement income. On the other hand, if you properly prepare, it’s possible to lower or eliminate your taxes in retirement.

2. Portfolio Diversification

While many retirees want to flock to less volatile investments like bonds and CDs, I firmly believe you need to maintain a healthy allocation to stocks during retirement. Given the low historical returns of bonds and CDs, plus rising inflation, as well as the planned distributions you take, you are in a potentially perilous situation. 

Why? Because you are putting yourself at major risk of running out of money in the later years of retirement. As former financial advisor Nick Murray points out, “A fixed-income investment strategy in three decades of a rising-cost retirement is suicide. It may only be suicide on the installment plan, but it is nonetheless planned suicide.”

3. Withdrawal Order

There is both an art and a science in terms of where to generate your retirement income. If you have money in taxable, tax-deferred, and tax-free accounts, you’ll want to carefully consider your distribution strategy, so you make tax-smart choices—not just in the current year, but over your lifetime. While it’s easy to understand how you might be taxed in the current year, you need to combine this knowledge with your future retirement goals, as well as what your income strategy will be 10 years from now. While taking money from one account may be advantageous right now, how will this decision affect your retirement and your tax situation 10 years from now? What you don’t want to do is decide the terms of your distributions today without regard for the consequences a decade from now.

4. Longevity Risk

Outliving your savings is a significant risk in retirement. Given the increasing life expectancy, making your savings stretch throughout your lifetime is crucial. A retirement planning expert can help you find a sustainable withdrawal rate, an appropriate investment strategy which is growth oriented, as well as guidance on when to take Social Security, all of which can increase your odds of having enough money to last your lifetime. 

5. Social Security Decisions

One in three people take Social Security as early as they can, at age 62. Is 62 the right time to claim your benefit? As you may know, your Social Security benefit continues to grow up until age 70, and the benefit you receive has a cost-of-living adjustment. It is certainly tempting to take it as early as possible, but you also have to consider the long-term ramifications of the lower benefit amount and how it could impact your lifestyle in your late 70s, 80s, and 90s. Additionally, there are tax ramifications of receiving Social Security and still having an earned income, as well as the impact it makes on tax strategies like a Roth conversion. 

6. Choosing the Right Medicare Plan

If you plan to retire before age 65, carefully review your health insurance options until you reach 65 and are eligible for Medicare. Once you sign up for Medicare, you’ll have a new set of decisions to make, including whether to sign up for Original Medicare (Parts A and B) or a Medicare Advantage plan. If you choose Original Medicare, then which Medicare Supplement plan should you choose? 

There are many pros and cons to each option, including price, coverage areas, co-pays and deductibles, and more. Also, if you don’t sign up for Medicare at the right time, it could cost you. Unlike Social Security, which rewards you for waiting to start your benefit, Medicare penalizes you with higher monthly premiums for the rest of your life if you don’t enroll in a timely fashion. Things get even more tricky if you continue to work past the age of 65 and are covered by an employer-provided healthcare plan.

7. Changing Rules and Regulations

As if this isn’t enough, you also have to stay up to date on the changing laws every new session of Congress may try to pass. Have ordinary income rates changed? Capital gains? Estate planning thresholds? Required minimum distributions? Social Security benefits or tax rules? That’s just the tip of the iceberg for you (or your advisor) to continually consider as you implement your retirement plan.

Set Up Your Retirement Strategy

After years of diligently saving for retirement, it’s essential to plan wisely for how you’ll use those hard-earned funds—for both you and your loved ones. While managing your finances during the accumulation phase may have seemed straightforward, the transition into retirement brings new complexities and higher stakes.

At The Rosamond Financial Group, our goal is to help you set up a retirement withdrawal strategy so you can enter your golden years with confidence and ease. Let us help turn your retirement goals into reality. Schedule an appointment to explore how we can support you on this journey. Call my office at 830-798-9400 or email solutions@rosamondfinancialgroup.com.  See what clients are saying about working with us.

About Preston

Preston Rosamond is a financial advisor and the founder of The Rosamond Financial Group Wealth Management, LLC with over two decades of industry experience. He provides comprehensive wealth management and financial services to successful business owners, corporate executives, and affluent retirees who enjoy simplicity and seek a professional to help them pursue their goals. Preston personally serves his clients with an individual touch, a sincere heart, and his servant’s attitude is evident from the moment you meet him. Learn more about Preston or start the conversation about your finances with him by emailing solutions@rosamondfinancialgroup.com or schedule a call on his online calendar.