Jason Gunkel, CFP®, CFA, CAP®, Chief Investment Officer
April 10, 2019
Experienced mountain climbers often say that going down a
mountain is far more difficult than climbing up. In a similar way,
after investors have “climbed up the mountain” of accumulating
enough savings for their retirement, figuring out the best way
to “climb down the mountain” or take withdrawals from their
accounts can be just as challenging.
The set of decisions an investor has to make when taking
distributions from their accounts can be divided into three broad
categories: retirement, tax, and investment.
The first category of retirement refers to making sure the amount
of the withdrawals are sustainable for the remainder of life. The
withdrawals need to be coordinated with retirement projections
that take into account many variables such as other resources
available and expected returns and inflation.
The second category of tax refers to the strategies trying to
minimize the taxation of withdrawals over an investor’s lifetime.
Investors can have different “buckets” of money that will be taxed
differently when money is withdrawn. These buckets may include
Traditional IRA or 401(k) money that will be taxed at ordinary
income rates, non-IRA money that will be taxed at lower capital
gain rates, and Roth IRA money that can be withdrawn tax-free.
The best analysis to determine the proper buckets to withdraw
from will include long-term income tax projections. Investors
do not want to deplete all of their lower taxed assets only to be
forced to withdraw from higher taxed assets later in life that push
them into a higher tax bracket. The tax projection could
highlight opportunities to incur more
taxes now or convert Traditional IRA
money to Roth in order to reduce the
required minimum distributions that
must begin at age 70½. There could
also be opportunities to realize capital
gains up to a certain threshold that will
not be taxed at the federal level.
Investors should be aware that the taxable income generated
from taking investment withdrawals can also affect the taxation
of their Social Security benefits and the amount of their Medicare
Part B premiums. These are other factors that need to be taken
Finally, the third category of decisions center around investments
and determining the best securities to sell to generate the money
needed for withdrawals. Investors would be wise to create
another “income bucket” of money consisting of secure assets
such as short-term bonds that can serve as the ultimate source
of withdrawals. This bucket should be funded with a minimum of
12 months’ worth of withdrawals so investors are not forced to
sell securities after a market downturn. Other good ideas for
refilling this bucket are having the dividends and interest generated
from other investments funneled into it or capturing gains from
good stock investments after a prolonged market upswing.
Mountain climbing is more dangerous alone so investors should
have a good financial advisor to help them trek down the
mountain of investment withdrawals successfully.