Nearing Retirement? Which bucket to take from first?

For decades, you worked and saved. Most likely contributing to a 401k or 403b through your employer.

If you were lucky, you also got a company match. Maybe you even had the wherewithal to save above and beyond a retirement plan through work.

Over the years, you saw your balance increase and then the day comes when you are approaching retirement.

Those paychecks you were receiving all those years will soon be ending and you will need a strategy to replace that income to meet your expenses. Daily living expenses as well as money for things like travel, healthcare, and new cars, etc.

No two situations are alike however, there are generally a few things to keep in mind at this point in your life.

Determine all sources of income once retired. This could consist of part time employment, Social Security, a pension, rental income, alimony, and investments
Figure out what your basic monthly expenses will be in retirement. Factor in larger expenses and don’t forget healthcare costs
If your income from Social Security, pensions, etc cover the lion share of expenses, great. If not, determine where the shortfall should come from
Be mindful of any tax implications as well as required minimum distribution rules that might apply
Last but not least, don't forget to factor in inflation. If that loaf of bread costs $5.00 today, it could cost over $10.00, 25 years from now¹

Coordinating all of this can get a bit tricky especially when one has multiple accounts in various forms.

Generally speaking:

Traditional IRA’s and workplace retirement rules share similar rules. But require taking required minimum distributions at age 72.
Roth IRA’s held individually do not require these minimum distributions
Roth 401k’s or Roth 403b’s, although tax free, do require minimum distributions to be taken (there is a way around this however)
Money taken from non-retirement accounts would not be subject to ordinary income taxes but could be subject to capital gains taxes or dividend income taxes

So, where do you pull money from if needed? Once you turn 59 ½, money can come out of retirement accounts with no penalty however, ordinary income taxes would be due. Therefore, before age 72, one should calculate how these withdrawals could affect their taxable income as the amount withdrawn would be added to ordinary income.

This could also have an impact on one’s Medicare premiums.

Here at FPS, we look at one’s taxable income to see how additional income might push them into a higher tax bracket.

If one retires at 65 and lives to 90, that is 25 years of no more paychecks.

Sitting down with a Certified Financial Planner® practitioner could make a lot of sense to help determine the best strategy for you throughout those years. Whether pulling money from Roth IRA’s first, individual accounts, or a tax deferred retirement plan can be determined once one looks at the whole picture.

Have a high earner adult child? Leaving them a friendlier tax advantaged account upon your passing like a Roth IRA might make sense.

As always, when making big financial decisions, it is always best to speak with and take the advice of a Certified Financial Planner® practitioner. Any questions, we are here to help you figure it all out.

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All the best.

Rick Fingerman, CFP®, CDFA™, CCFS®

Rick@PlanWithFPS.com

617-630-4978

1. I used an inflation rate of 3% over this time frame. Inflation could be higher or lower. For illustrative purposes only.

Financial Planning Solutions, LLC (FPS) is a Registered Investment Advisor. Financial Planning Solutions, LLC (FPS) provides this blog for informational and educational purposes only. Nothing in this blog should be considered investment, tax, or legal advice. FPS only renders personalized advice to each client. Information herein includes opinions and source information that is believed to be reliable. However, such information may not be independently verified by FPS. Please see important disclosures link at the bottom of this page.