Optimizing Your Withdrawal Sequence in Retirement

Retirement for individuals with substantial portfolios is less about making ends meet and more about managing your wealth thoughtfully. The order in which you withdraw from taxable, tax-deferred, and tax-free accounts can make a real difference in how long your assets last and how much you ultimately pass on to future generations.

Without a clear withdrawal plan, you could end up paying more in taxes than necessary or risk using up your savings too quickly. After decades of working with clients through every kind of market environment, Ron McCoy knows how important it is to have a disciplined approach to retirement income planning.

At Freedom Capital Advisors, our philosophy is to help clients develop withdrawal strategies that support both their current lifestyle and long-term goals. This article will highlight the importance of withdrawal sequencing and offer ideas to help you get the most from your retirement savings. For any specific tax questions, always be sure to consult a qualified CPA.

The Stakes of Withdrawal Sequencing

Withdrawal sequencing determines the order and timing of distributions from your accounts—There are three main types of retirement accounts: brokerage (taxable), traditional IRAs or 401(k)s (tax-deferred), and Roth IRAs (tax-free). Each comes with its own set of rules and tax considerations. For example, taxable accounts may involve capital gains taxes, while tax-deferred accounts are subject to regular income tax when you withdraw funds. Roth accounts can allow for tax-free withdrawals if certain requirements are met.

For investors with larger portfolios, the order in which you withdraw funds can influence not only your tax situation, but also the longevity of your portfolio and even your healthcare costs in retirement. Research from Vanguard has shown that a well-planned withdrawal strategy can help extend the life of your retirement savings by several years and reduce the amount paid in taxes over time.

At Freedom Capital Advisors, Ron McCoy draws on decades of experience to help clients focus on tax efficiency and long-term preservation of their wealth. By taking a thoughtful approach to retirement income, you can help make sure your portfolio keeps working for you throughout retirement. For specific tax guidance, always consult with a qualified CPA.

Case Study: Rethinking Withdrawal Strategies for Retirement

Jane, a 62-year-old entrepreneur, entered retirement with a sizable portfolio divided among taxable, tax-deferred, and tax-free accounts. Her original plan was to withdraw money from each account in the same proportion as her holdings. While this seemed straightforward, it resulted in higher taxes and increased healthcare premiums.

When Jane began working with Ron McCoy at Freedom Capital Advisors, the focus shifted to reviewing her withdrawal strategy more closely. By carefully considering the types of accounts she held and when to access each, Jane was able to make more informed decisions that helped reduce unnecessary costs and supported her long-term goals.

This example highlights the importance of regularly reviewing your withdrawal approach, especially when your financial situation or the rules around retirement accounts change. Working with a financial advisor, and collaborating with a qualified CPA, can help ensure your plan continues to meet your needs and supports your goals well into retirement.

Key Strategies for Optimizing Withdrawal Sequence

For retirees with larger portfolios, creating a thoughtful withdrawal strategy can make a real difference in the long run. Here are a few important ideas to consider as you approach retirement income planning:

1. Review the different types of accounts you hold—taxable, tax-deferred, and tax-free—and understand how withdrawals from each can impact your taxes and overall financial picture.
   
2. Consider drawing from taxable accounts first, which can sometimes provide more flexibility and allow your tax-deferred accounts to keep growing.
   
3. Postpone withdrawals from tax-deferred accounts when possible, especially if you are not yet required to take distributions.
4. Allow Roth accounts to grow tax-free for as long as you can, which can be helpful for both late retirement needs and legacy planning.
   
5. If charitable giving is part of your plan, there may be ways to coordinate gifts with your required distributions for added benefits.

Actionable Tips from Ron McCoy

• Take time each year to review your portfolio and discuss your withdrawal plan with a fiduciary advisor. Knowing where you stand can help you make more confident decisions about your financial future.
  
• Consider running scenarios to see how different withdrawal choices might play out. Modeling can help you spot risks and feel prepared for whatever the markets bring.
  
• Work closely with tax professionals to ensure your withdrawal plan fits with your broader tax situation. Having a CPA on your team is always a smart move.
  
• Keep an eye on legislative changes that might affect retirement planning. Staying informed with the help of your advisor can help you adapt your strategy if needed.
  
• Look for ways to keep investment costs down. Reviewing your holdings and being mindful of fees can help you keep more of your gains over time.

Challenges and Considerations

Creating an effective withdrawal strategy in retirement comes with a few challenges. Market downturns, unexpected expenses, and longer life spans can all influence your plan. It is important to consider how changes in the market or your personal circumstances might affect the timing and amount of your withdrawals.

Staying aware of how taxes, healthcare costs, and other factors could impact your finances is key. Regularly reviewing your plan with your advisor and checking in with a CPA can help you adapt to changes and stay on track. Building flexibility into your strategy gives you a better chance of weathering surprises and supporting your goals over the long term.

Conclusion

For investors entering retirement with significant portfolios, the order in which you withdraw funds can have a real impact on your financial future. Taking a thoughtful approach, backed by years of experience and a commitment to your best interests, can help make your wealth last longer and support your goals.

At Freedom Capital Advisors, we believe in developing personalized strategies for every client. If you would like to review your withdrawal plan or have questions about optimizing your retirement income, visit freedomcapitaladvisors.com to schedule a complimentary strategy call. Working with a dedicated team helps you feel confident that your financial plan is built to last.