Do You Have a Spend-Down Plan for Your Retirement?

Kathy Longo, CFP®, CAP®, CDFA Monday, 26 February 2018

Do You Have a Spend-Down Plan for Your Retirement?

A great deal of emphasis is placed on saving for retirement--as it should be. It is probably one of the most important long-term investments you will make in your life. But what is not discussed as frequently or in as much detail is how people withdraw money from their retirement savings accounts and other investments.

It is not a cut and dry process, as taking from one pot could cost you more than withdrawing from a different one. In fact, a study by Vanguard Research states that an effective withdrawal strategy can add up to 1.1% of annualized value without taking more risk.Withdrawing money to responsibly fund your retirement years takes discipline and some knowledge that may not be obvious to a lot of retirees. This article provides a breakdown of the basics so you can be better positioned to enjoy your retirement once you are ready.

Where to Draw from First?

Conventional wisdom tells us that everyone should spend down their assets in a sequential order. First, you draw from your taxable investment accounts, then your tax-deferred retirement accounts, and then non-taxable accounts.

For some people, that strategy makes a lot of sense, but in other circumstances, it makes more sense to flip the strategy around. It really depends on the unique situation for each individual. If leaving your heirs the largest amount possible is important to you, then you may opt to leave any available Roth accounts until the end. If paying as little income tax as possible in the first years of your retirement is important, then you would begin by drawing down from your Roth first.

This decision really depends on your goals and activities in retirement. The best way to begin is by determining what those goals and plans are and then working with an experienced advisor to help you put a spending plan in place that will minimize what is being paid in taxes and give longevity to your retirement savings.

What Amount do I Need in Cash?

It is advisable to have two to three years available in a mix of cash and other safe investment options such as high quality, short-term bonds. That is enough to cover daily expenses as well as any emergencies that come up. This also creates a safety valve so that your spending power isn’t tied to the whims of the markets. Again, the actual cash amount varies based on your individual circumstances. If you have cash flow from a pension and Social Security and those incomes satisfy your daily expenses, then you might have less cash on hand and instead, let it earn interest in bonds or grow in stocks. The reason for this is that you’ll have more time to recoup if there is a market downturn.

Prepare for the Unexpected

It is important for everyone to have a cash cushion to handle unexpected expenses and retirees should have a larger cash reserve than people who are still working. Relying on your investments for unexpected expenses can trigger some unexpected tax consequences. Liquidating money from a taxable or retirement account could bump your income for that year into a higher tax bracket and cost you a bundle, unnecessarily.  A cash reserve or having access to a home equity line to cover this short-term need can be helpful to minimize taxes.

Spend Down Strategy for Two

It is common for those receiving a pension to make the mistake of selecting the highest income per month they can get, using the single life distribution option. The thought process is that it will limit their withdrawals from retirement savings accounts. However, what is not being considered is that losing that pension could be a major reduction to the surviving spouse’s income. The result is that the surviving spouse will have to reach further into their nest egg later in life and pay higher taxes on those accounts that are taxable.

It's Circumstantial

These are all guidelines with good general advice, but it is important to not follow the rules blindly when it comes to your retirement spend-down plan. These guidelines are highly dependent on the specific circumstances of each individual or couple. Our team places a lot of emphasis on starting the retirement planning process with big conversations about the client’s goals, their financial circumstances, their health and their lifestyle prior to designing a retirement plan (including a plan to withdraw money). There is no way to build an effective long-term plan without all of the information while maintaining flexibility to respond to any of life’s many surprises.

If you have questions about your spend-down plan in retirement and you are interested in meeting with the team at Flourish Wealth Management, we encourage you to complete the Contact Us form and schedule an introductory phone call or meeting.

[1] “From Assets to Income: A Goals-Based Approach to Retirement Spending” by Vanguard Research, September 2016.

About the Author

Kathy Longo, CFP®, CAP®, CDFA

Kathy Longo, CFP®, CAP®, CDFA

Kathy Longo brings over 25 years of expertise and experience to Flourish Wealth Management. Kathy is wholly dedicated to improving the life of each client and finds joy in making complex matters simple and easy to understand. She excels at asking the right questions, uncovering new possibilities and implementing the most advantageous strategies for success. Playing such a pivotal role in her clients’ lives remains an honor and a privilege. After earning a degree in Financial Planning and Counseling from Purdue University, she began her career at a small firm in Palatine, Illinois where she worked directly with clients while learning to build a viable, client-centric business. Over the years, she gained extensive knowledge and wisdom working as a wealth manager, financial planner, firm manager and business owner at notable, various sized companies in both Chicago and Minneapolis.


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