Retirement Daily’s Robert Powell sits down with Sensible Money’s Dana Anspach to address the 10 most common questions in retirement.
In today’s episode, Anspach discusses the common retirement question: What are my sources of income, and what financial resources should I tap into earlier in my retirement?
Anspach says starting with a timeline is usually best. This timeline outlines the sources of income that come from non-financial activities. Things like Social Security, pensions, annuities and deferred compensation plans are always taken into consideration.
After everything is laid out, Anspach says it’s time to sort out what has to come from the other financial asset. “When we think about those, we group things by tax treatment,” he says. “Here’s your non-retirement account. There are your sources of tax-free cash flow like Roth IRAs or health savings accounts. Then there are your traditional assets: 403(b), 401(k), and IRA plans. Every dollar that comes out of it will be taxable.”
Anspach also says not everyone needs to leave their traditional assets alone until age 72 as it depends on what would be more tax efficient. With that, he also expresses how he’s not a fan of “rules of thumb,” especially the one that dictates the order of accounts from which to withdraw money. “[The] the rule of thumb comes from this traditional thought process that you should let your tax-deferred assets grow inside that tax-deferred wrapper for as long as possible,” Anspach says. “But when you actually write that into a spreadsheet that takes into account taxes, is not always the right answer.”
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People who have a large source of taxable income from pensions or deferred compensation plans might wait until age 72 to start their RMDs. However, people who don’t have it are encouraged to withdraw their money sooner because it can often lower their RMDs. IRMAA — the monthly income-related adjustment amount for Medicare premiums — also affects when people should withdraw money, according to Anspach. “The higher your adjusted gross income, the more you can pay IRMAA premiums,” he says. “So it looks like backlog, but sometimes taking money out of your retirement accounts early in retirement can actually reduce the overall tax impact you’ll experience later in retirement once you’re 70 and older.”
Another thing to keep in mind is the idea of doing what’s tax efficient this year, but also what creates tax balance for the rest of your life. Anspach says that using a reasonable set of assumptions can help model what tax rate, or marginal rate, someone’s income will fall into. He again emphasizes that one size does not fit all and that determining tax efficiency depends on the situation of the individual.
Anspach concludes by mentioning rental properties and income which should be taken into consideration. “So just when you plan for these things can matter.”
Stay tuned for the next most common retirement question, in which Anspach discusses whether someone should leave their 401(k) with their employer or roll it into an IRA.
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