The decisions involved in retirement income planning can be daunting. Every choice seems to have far-reaching implications with the potential to make or break your plan. In part, it’s because the process itself represents a psychological and strategic shift.
Emotionally, going from accumulation to distribution is an adjustment. You’re moving from addition, which feels good, to subtraction, which feels like a ticking clock. Just thinking about the constant drawdown forces many retirees to ask, “Will this be enough?”
The question then becomes how? Given all of the variables that impact retirement income, how can you create a plan that accounts for everything?
In a sense, the solution is to answer the complexity of retirement income planning with more complexity, in the form of a comprehensive, well-coordinated strategy that recognizes and treats this stage as distinctly different from the one that came before it.
Retirement Income Planning Is Hard
Retirement income planning feels hard because it is, especially compared to the growth stage. While there’s a linear simplicity to accumulation – save, invest, grow – distribution presents several variables that can erode and substantially diminish your savings:
- Market volatility - You can't just ride out a downturn anymore.
- Taxes - Retirement taxes can be surprisingly high and complex.
- RMDs - Required minimum distributions can push you into a higher tax bracket.
- Social Security - Get the timing wrong, and you could leave money on the table and pay more in taxes.
- Healthcare and IRMAA - You need to plan for rising costs and manage potential Medicare surcharges.
- Inflation - Rising costs can turn a comfortable income at 65 into a tight budget at 80.
Adding to the challenge is that these factors don't exist in siloes; they interact with and impact each other. When you claim Social Security, it affects how long your portfolio needs to stretch. Withdrawal sequencing and social security timing affect your tax bracket. Your tax bracket affects IRMAA and whether a Roth conversion makes sense. Everything together determines how comfortably you can live for how long.
Coordination Builds Confidence
The complex nature of retirement income planning can seem overwhelming even to experienced investors, but the right combination of expertise, strategy, and coordination can help create a resilient plan designed to account for and address these variables.
There is no one-size-fits-all playbook. The right plan for you isn't the right one for your neighbor, even if you've saved the same amount. However, there are frameworks that can be used to coordinate distributions in a way that makes your savings last, reduces your tax burden, and instills confidence in your plan’s long-term durability.
- Bucketing: This framework divides your assets into near, mid, and long-term buckets based on when they’re needed, when it’s most advantageous to access them, and their tax liability. Liquid assets go in the near-term bucket for income in the first years of retirement when a market downturn is damaging. Roth assets, with their tax-free growth, typically go in the long-term bucket to compound.
- Tax Strategies: The question isn't just how much you have, but how much you can keep. For most people, most of their retirement savings are in tax-deferred accounts like IRAs and 401(k)s, where every distribution is taxed as ordinary income. Withdrawal sequencing can help minimize your lifetime tax burden and keep you in lower brackets longer. Strategic Roth conversions can reduce future RMDs, lower lifetime taxes, and create a tax-free asset for later in retirement or for heirs.
- Stress Testing: This involves running your plan against a variety of what-if scenarios to test how it holds up. What happens if the market drops in year two of retirement? What if you live to 95? What if inflation runs hotter than expected? What if you need long-term care? Modeling challenging scenarios and adjusting your plan as needed to ensure it holds builds confidence.
Complex problems rarely have simple solutions. Retirement income planning is complex and challenging, but it doesn’t have to be overwhelming. The simple solution is to seek guidance rather than trying to piece the puzzle together yourself.
You may have felt comfortable handling your 401(k) on your own, but the nuances of retirement income planning often require working with a partner with specialized expertise and proven experience to design a plan that provides peace of mind and confidence.
Simplify your retirement income plan with a roadmap that offers clarity for the road ahead. Schedule time to speak with our retirement planning experts.