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2023 EP0429 | Financial Updates | Traditional Proportional Withdrawal Strategy

Planning Matters Radio / Peter Richon
The Truth Network Radio
April 29, 2023 10:00 am

2023 EP0429 | Financial Updates | Traditional Proportional Withdrawal Strategy

Planning Matters Radio / Peter Richon

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April 29, 2023 10:00 am

Having a tax-efficient withdrawal strategy in #retirement can save you thousands of dollars. A good strategy will minimize the total taxes paid over the course of your retirement, which will increase your wealth and the longevity of your portfolio. In this video, Peter Richon with Richon Planning and Erin Kennedy break down two very different strategies: traditional and proportional. The traditional approach has you spend your retirement money in this order: taxable, tax deferred, tax exempt. On the other hand, the proportional withdrawal method would have you take a proportional amount from all of your accounts. While certain headlines will champion one strategy instead of the other, there is no clear-cut answer for everyone. The only way to determine your most tax-efficient withdrawal strategy is to crunch the numbers, speak with an expert, and revisit that strategy as your goals and finances change. If you'd like to see which strategy makes the most sense for you right now, please feel free to give Peter a call at (919) 300-5886 or schedule a complimentary visit at #WealthManagement #TaxStrategy #Taxes

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We want you to plan for success. Welcome to Planning Matters Radio.

Peter, good to see you today. We are talking tax savvy withdrawals in retirement. I'm excited about covering this because I'm a little bit confused about it. So, of course, having a tax efficient withdrawal strategy in retirement can save you thousands of dollars. So that means it will minimize the total taxes paid over the course of your retirement, thereby increasing your wealth and the longevity of your portfolio.

So here's my confusion, because there are two separate withdrawal strategies, traditional versus proportional. The traditional approach is that you spend your retirement money in this order, taxable, tax deferred, tax exempt. So walk me through, please, why that's considered tax efficient. Well, because we are continuing to grow and compound on buckets that do have certain tax qualified advantages. So the tax deferred is like your IRA. The tax exempt would be like a Roth IRA. Right. And those have special advantages under the tax code when we have money within those buckets, they get to grow tax deferred rather than the growth being taxed as we go.

And so traditionally it was let's use up the money that is taxed on growth as we go first, because that's our least advantaged money. But in life, there's oftentimes kind of an absolute that is stated in theory when in reality, it's a little bit more complicated than that. OK, Peter, thank you. So now I want to walk through the other method. So this is called the proportional method, and it would have you take a proportional amount from all of those accounts, which, according to Fidelity, will lead you to paying less in taxes. They provided this visual as proof behind the proportional method being more tax efficient.

Yeah. And I actually like this visual and this methodology, this way of thinking a little bit better, because I don't think that there is an absolute truth to anything here. You know, in science class, they talked about the scientific method where everything remains the same, but only one variable changes to test an outcome, to test a theory.

And that's not the way life is. All the variables are moving all of the time. And in retirement, a lot of variables can change year to year.

I like the flexibility of having control and having different buckets to be able to access to better control our outcome. Now, there are some certain points in time where there are some mandates on us, right? If we've got money in that tax deferred bucket and let's say we didn't necessarily need it and we didn't want to pull from it because it would bump up our taxable income, well, sooner or later, you have to. The IRS mandates that at a certain point in time.

It's called required minimum distributions. And so if we can jump on that ahead of time and begin to control and manage that, that's one variable that we may be able to remove from the equation and better determine our outcome. So there are year to year situational specifics that's going to give us an optimal outcome. And then every person individually may have a different combination of assets in these different tax buckets, these different tax categories.

And so there is no universal solution here. It's just we've got to crunch the numbers on a yearly basis. Do we think we're going to be in higher income tax brackets or situations or rates down the road? Do we think we're going to be in lower tax brackets or situations? Is Social Security taxation an issue that will change depending on what bucket we pull our money from? Is the cost of Medicare premiums Irma? Medicare premiums are means tested, Aaron.

So if you make a certain amount of income on your tax returns on paper, which is determined by what bucket you pull that money out from, then your Medicare premiums for part A or part B and D could be increased significantly. Right. So those are the kind of things that we need to factor in when we are looking at this. And it's kind of like math class with please excuse my dear Aunt Sally, the pedemas, the order of operation. You remember back to algebra. If you did the math equation in the wrong order, you got the wrong answer. But every year there's different variables in retirement there. So we we do have a correct order, in my opinion, but that correct order is not going to be universal and set it and forget it. And this is the right answer for everybody. So that's a longer headline, right? As I Google, like, so what's the right withdrawal, withdrawal strategy and retirement?

How can there be a gray area considering there are so many variables? I mean, there are clearly two camps on this. Yeah. Well, there's two camps on when to claim and collect Social Security as well.

Right. The the one camp says run out and get it as soon as you can get it at 62 because you'll you'll make the most early on. And the other camp says, no, hold on.

Wait all the way until 70, because that's when your benefit will be the highest. And there is a kernel of truth in both of those. But neither one of them are universally correct.

It's just the way life is right. The reality is usually much more complicated than the theory or the two extremes that that seem to form the opinions. And so we really need to look at this on a case by case basis. And even in my individual case, I'm going to have to look at it on an ongoing basis. Planning is never set in stone.

It is a plan for the future, but that plan needs to be adaptive and be nimble because my situation changes and the world around us changes on a constant basis as well. So, again, Aaron, we're not just isolating one variable like in science class here. We've got to continue to be proactive to manage and control taxes.

But, you know, there are strategies to help to control those. You can determine which bucket you place the money in and which bucket you pull the money out from. And there's going to be kind of like your water meter on each one of those buckets, right? The meter is either before you put the money in or the meter is either when you pull the money out or the meter could be running all the time.

We have to understand those water meters, which is the tax bill, and we have to control them as much as possible. Right. Well, that's why I have you, Peter, you know, to sort through all the gray areas that you see online. This was incredibly helpful. If somebody has questions about figuring out their proper withdrawal strategy, what's the best way to reach you? And that's the secret. It's your proper withdrawal strategy. There is no universal answer. And sorry to say it depends because that's not a fantastic answer ever.

But that's the reality of the situation is that we've got to look at the situational specifics. So if you'd like to and make sure that, you know, you are doing things in an efficient manner from a tax standpoint, feel free to give us a call. Nine one nine three hundred five eight eight six nine one nine three zero zero fifty eight eighty six or go online. Rashan planning dot com. You can email me, Peter, at Rashan planning dot com.

Happy to work through this. This is part of our optimized retirement planning process. It is a plan that looks at income, investments, taxes, health care and legacy.

And the situation for creating efficient income during your life may be very different than creating efficient legacy. Again, very situational specific. Aaron. Yes. All right, Peter, thank you very much for all your help with this. All right.

Thank you. This has been planning matters radio. The content of this radio show is provided for informational purposes only and is not a solicitation or recommendation of any investment strategy. You are encouraged to seek investment tax or legal advice from an independent professional adviser. Any investment and or investment strategies mentioned involve risk, including the possible loss of principal advisory services offered through Brooks own capital management. A registered investment adviser fiduciary duty extends solely to investment advisory advice and does not extend to other activities such as insurance or broker dealer services. Advisory clients are charged a quarterly fee for assets under management while insurance products pay a commission, which may result in a conflict of interest regarding compensation.
Whisper: medium.en / 2023-04-29 12:12:46 / 2023-04-29 12:16:25 / 4

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