Far too often we focus on adding to investment portfolios and not spending those assets as financial planners.
This is crazy, as the whole reason to save money is to SPEND it on things you enjoy. Spending can be as difficult as saving, as it is the reversal of 30-40 years of behavior.
This phase of life should be one of enjoyment and not worry, so let’s go through a 5-step process for determining optimal withdrawal strategies.
- Get organized: How much do you have and how will you be taxed? If you have Roth assets, traditional IRA assets, and taxable account assets, list them out on a spreadsheet and determine the percentage of your assets you have located in each “bucket.” This sounds basic, but getting your bearings is vital.
- Withdrawal requirements: Traditional IRAs will have required distributions by the time you hit age 72. It is important to know if you are currently required to take money out of your IRA and to forecast what that amount will be in the coming years.
- Spending needs: Now it is time to complete cash flow planning if you haven’t already. This will assist in determining how much you need to withdrawal monthly/quarterly/annually from your accounts to meet your spending needs – both fixed (mortgage, utilities, etc.), variable (vacations), and occasional (new car, home repairs, renovations).
- Tax Impacts: Once items 1-3 are determined, it is time to measure the tax impact of taking withdrawals from your various buckets and determining the “pre-tax” amount you will need to withdrawal to meet your regular “post-tax" spending needs. This includes reviewing any unrealized gains in your taxable investment accounts, determining dividend income and possible capital gains distributions, and a review of other income sources (pension, social security) that will impact your tax bracket.
- Put your plan in action and monitor it regularly: Once you have these items in place, data should drive your decisions. If you are in a low tax bracket – spending more from your Traditional IRA is likely sensible. Will IRA distributions push you into a higher bracket? Consider using taxable investment accounts to meet your spending needs. Selling a business/property or have installment sale taxes for the current tax year? Consider Roth IRA withdrawals if feasible.
At the end of the day, finance is personal and try to stay away from “one size fits all” recommendations and rules of thumb. Just because your neighbor is doing one thing doesn’t mean you should do the same, even if your situations appear to be almost identical.
Want to learn more? Schedule a meeting with us.
This material has been prepared for informational purposes only and should not be used as investment, tax, legal or accounting advice. All investing involves risk. Past performance is no guarantee of future results. Diversification does not ensure a profit or guarantee against a loss. You should consult your own tax, legal and accounting advisors.
Frankly Finances is a registered investment advisor with the state of Florida and only transacts business in states where it is properly registered or is excluded or exempted from registration requirements. Registration does not imply a certain level of skill or training. Please refer to our Form ADV Part 2A disclosure brochure for additional information regarding the qualifications and business practices of Frankly Finances.