Early Retirement - Financial Freedom (Investing, Tax Planning, Retirement Strategy, Personal Finance)

Where Should I Withdraw Money From First In Retirement?

• Ari Taublieb, CFP®, MBA • Episode 187

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Most people take income in retirement and hope they never run out of money. I also hope you don't run out..but I don't want you dying with millions (unless there are specific legacy goals) or paying more taxes than necessary along the way.

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Ari Taublieb, CFP ®, MBA is the Vice President of Root Financial Partners and a Fiduciary Financial Planner specializing in helping clients retire early with confidence.

Speaker 1:

I'm going to come out and say this is going to be the most important episode you ever listened to.

Speaker 1:

Now, I have a lot of different episodes that I've recorded, so I'm not saying that lightly, and the reason for it is because it applies to all of you. When all of you determine that there's going to be one day you want to stop working and look, I recognize a lot of you don't want to actually stop and do nothing. You just want to do something more fulfilling. But there will become a day where you say, yeah, I don't know if I want to do this, the same degree and maybe you're stopping work temporarily, maybe it is for good, and you're going to need to withdraw income from somewhere, whether that's a Roth IRA or a traditional IRA or a 401k or a brokerage account. I'm going to give you an example today so you can understand what is the best account to pull from, based on the different scenarios going on. What is the best account to pull from based on the different scenarios going on? This, to me, is the most important thing when it comes to retirement planning, specifically withdrawal strategy. Now, when I say withdrawal strategy, that might not sound like the sexiest thing in the world, which I recognize. Now it is for weird people like me, but I want to make sure all of you are not unnecessarily withdrawing money too quickly, and I'm going to show you a story. Really tell it to you first, and then I'm going to show it to you through my example. So most of you already know, but if you don't, my name is Ari Taublieb. I'm a certified financial planner. I am the host of this podcast, early Retirement, and Vice President at Root. Many of you are listening right now on the podcast app, in which case, great, if you are watching on YouTube, you can see I'm in one of the root vintage shirts right now, so you can see the logo right here. This is our 2020 logo. So a lot of you are like, wow, you guys have come a long way from here. So I want to make sure that all of you guys are getting the exact guidance you're looking for. So, whether it's tax or withdrawal or estate, if you're on YouTube, I invite you to subscribe. If you're listening on the podcast app, I invite you, if you don't mind, to share this with someone you want to retire early with. It's just more fun that way. So let's have some fun.

Speaker 1:

So this is what I imagine going on in your brain right now. You're going well, there's going to be a day, maybe it's in a year, maybe it's in 10 years, where you're going to want to stop working. But part of you is thinking maybe I shouldn't spend as much as I'd like because you know I don't have social security yet and maybe there's not my pension on yet, or maybe I don't even have a pension, so it's all up to my portfolio. So that's going on in kind of one part of your brain. Okay, now the other part of your brain is going wait a second. These are my years where I've got my energy and my health. So I want to still spend, and maybe the money is actually worth more because I have my energy and health at the level, of course, that I'd like it to be at. But I don't want to overspend and run the risk of running out. Now most of my clients are saying I wish I spent more along the way, because I knew I was in a good spot, but I just didn't feel it and so I underspent and now I have plenty of money, but I don't have my health. Now, that's not the majority of the world, but it's the majority of people coming to me. So those are thoughts that might be in your head right now. It could be totally wrong, but I'm taking a guess and that's for most of you, and I know that because I'm talking to a lot of you on a consistent basis. So what I want to now give you is an example. Now, before I give you the example, I want to tell you the comment of the week that I want to go through, and every week I try to keep it as engaging as possible, and this is a fun one.

Speaker 1:

So this comes from Ryan Retirement 6662, who says I retired at 33 years old. Most of my investment is from a single stock and crypto. I never invest in 401k and Roth IRA because those retirement accounts never help people. A lot of you are seeing me laugh visibly right now, but if you can't tell I'm laughing I never invest in 401k and Roth because those retirement accounts never help people retired at 35 years old or 50 years old. Now, this I'm laughing at because if I knew that we could pick a single stock and it would let you retire at 33, I'd be like sign me up, guys. What are we doing here? But I don't, and no one really does. And this person, ryan, retirement six, six, six, two. Good for you. It sounds like maybe he even got out of that position. But I'm even bringing up this comment and highlighting it because no one has a crystal ball.

Speaker 1:

Now I teach my clients to say a phrase when their neighbor or coworker says you know what? You know you should think about this long term care policy. Or you know there's this tax stuff that you should really be doing if you're going to retire early. And you know my nephew, I know they're only four, but they said it's a really good strategy. But they said it's a really good strategy? Of course not, but my point here your job is to say that sounds interesting, but it does not apply to me. Or it might not apply to me, but I'll look into it. And it helps my clients because they're often pitched ideas from their friends and family. They're like you should do this with your strategy or the dividend approach, and there's no right or wrong. It just might not apply to you. So for this particular person, I'm like great, sounds like you got an investment that did really well for you and you've got crypto. Good If that put you in a position where you can retire comfortably and live the life you want to live. I'm happy for you. Now I have a client that has $6 million worth of crypto and I'm very impressed with them because they went.

Speaker 1:

Ari, it was a total thing that, to be honest, a friend told me about early on. I got in on it. It's done really well for me and I hate it. I go. What do you mean? You hate it, they go. It just gives me so much anxiety every day having this thing that's this volatile and can you just help me get out of it? I don't care what I have to pay in taxes. That's really rare because most people go well, I've got this crypto and look how well it's done. I got to hold on to this and then, yeah, it's going to fluctuate and if you're comfortable with that level of volatility, great, most of you don't need to do that. If you've done a good job saving and investing, you don't need to take on this crazy risk that I personally would never take on. I have plenty of time to let my money grow and I want to be invested in companies that have real profits, that have people working for them. There are it, there are shareholders. It's very real. I'm not saying crypto is not real. Some of you are like you hate crypto. I don't hate. I don't hate anything. I hate the concept that you might be overly aggressive, which is completely unnecessary for you to accomplish what you care about most. I work with humans, not robots.

Speaker 1:

I've told a lot of you this story, but my dad works for Monster Energy. He loves Monster Energy. It's been literally the best performing stock over the last couple of decades. If I told him he had to go sell Monster, he would shoot himself in the foot because he would feel so poorly when it went up in value. And I said well, dad, why don't you just go own all Monster? He's like well, that's too risky. And I go exactly, you don't want to own so much of one thing that it dictates your ability to travel or do what you want to do in life. So when you guys are thinking about any time someone brings up this investment or this stuff, I believe in the low cost, diversified approach because it works. It's not because there's not something better. There's plenty of stuff that's better out there, but is it worth the hassle?

Speaker 1:

I often give my real estate example. I have a client that has a property and it's currently giving them 12%. And they're like 12% is awesome. All in meaning appreciation and rental income, all in the total return is 12%. And I said you could go to the stock market and get 10% on average, but it's never going to exactly perform at 10%, it's just as an average. And there was a period of time where they're like I want that extra 2%. That, to me, holds a lot of weight and I like real estate, so it kind of gives me something to do.

Speaker 1:

Then, all of a sudden, we had a conversation because they were coming closer to retirement and they did not want to own this real estate because now it's forcing them to take more of their time and energy. And they did not want to own this real estate because now it's forcing them to take more of their time and energy and they don't want to be traveling worrying about the roof that's leaking. And I said but you could get a better return. And they're like yeah, I get your point. Here. There comes a point where I could always get a better return. You want the best return? Go work 30 more years Like your portfolio is going to be epic, but your life won't. So how much is enough and how do we think through return? So, highlighting this comment from Ryan Retirement 6662, good for you, but I still like 401ks and IRAs and Roth IRAs and all that fun stuff.

Speaker 1:

So let's hop into the example for today. Now, sometimes I'll do a real client story and I'll walk you through that. I'm not doing that today. So if you see me on YouTube kind of reading through my example here, I created this because I think it's going to be the most applicable thing for you. But there are a few clients that, of course, along the way I'm going to give you examples of that are, of course, actually looking at this right now. So basic premise of today and why I said this is the most important episode that I've recorded yet.

Speaker 1:

All of you are going to have to take money from somewhere. Now, some of you might have a pension or social security or you might have rental income, whatever it is but the majority of you have your portfolio and it's going to be a large driver of what you're going to live off of. So I'm going to give you it's not another long story, it's another important story for you to understand how I need you to view your portfolio. Then I'm going to tell you how to withdraw from certain accounts over others and why. So let's have some more fun.

Speaker 1:

Number one I need Like you are running a business. Here's what most people do. They go I want 10,000 a month in retirement. Pick me, they take 10,000 a month, no matter what Markets are doing good, markets are doing bad. They want 10,000 a month because that's what they need to live off of. Great. I want you to meet your living expenses, but we don't get to live in dreamland in the table. And you're like starting to scare me here, ari, are you telling me I can't like meet my living expenses working with you? I go just the opposite. Think about it like owning a business. If your portfolio is a business and your business is doing well, you might go higher. You might buy more equipment, you might do other stuff that's going to grow the business. Are you going to do that in years where the business is not doing well? Probably not, because it would not make sense to do that.

Speaker 1:

Here's the risk a lot of you are going to run if you're not thinking about this intentionally. Markets are going to go down and you're going to go well. I need my 10,000 a month. You're going to take 10,000 a month. But now not only are markets down, not only are you taking your 10,000 a month, you're probably taking more than that, because we've got healthcare expenses before Medicare kicks in, we've also got our energy and health. So maybe you're going to travel more, maybe there's a remodel, and so the risk you run is markets don't do. Well, you've got all these expenses and now it withdraws so much from your portfolio you can't actually spend what you want to the rest of your life. That's a big risk I've seen. So to add on the real risk here, what if it's now all, all in the s? P 500 or all in just a few concentrated parts of the market? Well, now the real risk is markets are down significantly. You're withdrawing so much that now, yeah, you took your trips the first few years, but the next 20 years of retirement you can actually do what you want to do. So that's kind of number one.

Speaker 1:

Think of your portfolio like a business. What I tell my clients is there are going to be times where markets are up and I need you to go fly first class, and if you don't, I'm going to be pissed, because I told you and you told me you didn't want to die with $12 million and I told you it's my job to help you make sure that doesn't happen. Then there's going to be other months where you're really not going to like me and I'm going to ask you to temporarily not forever, but temporarily spend $8,700 a month instead of $10,000. And you're going to be like why are you the meanest guy ever? I go. It's because if we do this and implement these conversions or tax technique, here's what it's going to be able to create for you over the long term. You're like whoa, I didn't know that was an $80,000 decision. I just didn't understand it. Now I'm on board, so I want you to think about it like your portfolio is a business. There's going to be times it's doing well and times it's not doing well. I want you to adjust your income on that dynamic basis. Now some people are like, hey, no matter what, I just I want this amount every month. I go great, I want you to always have that amount and this is your core living expenses.

Speaker 1:

The question is can we do a lot more Meaning? Can we spend more if markets are doing really well? Help out a child with a wedding or extra travel and then in other months, can we temporarily literally for a few months possibly cut spending to implement more tax strategies so you can spend way more the rest of your life. So that's the quick thing to understand. Now let's give you an example. Okay, so if you are currently looking at my screen on YouTube, great, if you are currently listening to this, I'm going to explain it just as easily for you.

Speaker 1:

Most of you and I'm going to I know I'm not sharing my screen quite yet, but I'm going to share it for you in a second Most of you have a combination of brokerage accounts, iras, roth IRAs. I'm just going to keep it really simple for you. Okay, let's assume you have a million dollars in an IRA, got it. Another million in a brokerage account. Some of you are like whoa, but like you know what are the gains and the cost basis. We're going to go through that, okay. And then a hundred thousand in a Roth IRA, $2.1 million, and I'm going to pretend you're 55. Oh, is that like a real client? No, just giving you an example. But I have a lot of clients who are exactly not exactly, but in a very similar position. So some of you are going to be in this position soon. Some of you are like, yep, I'm already here. I need you to tell me what I need to do.

Speaker 1:

So number one is where do you pull money from? First, roth IRA don't touch it. Let that grow as much as possible. It's going to compound tax-free Great, we want it to do that. So I want you to remove that from even the conversation of where do we pull money from. Some of you are like, yeah, but I could pull from it and then I don't pay. You know it's incomes really low. I literally already was taxed on it, so I never pay taxes again. You're right, and I don't want you to ever take from that. I want you to not ever. I want you to take me later.

Speaker 1:

Now here's what we have left A million bucks in IRA and a million bucks in a brokerage account. The internet, which I'm very grateful for, which is how a lot of you get to digest this content and not just mine, but my partner James and all of our content is awesome. But there's a lot of fluff out there. You might see an article that says you need to pull from your IRA first. You need to pull from your 401k or your brokerage account. Here's the answer. There's no answer and I'll give you an example so you understand why. Let's assume you have a million in your IRA and you have a million in your brokerage account. Let's assume that brokerage account was inherited from your mom and you got a step up in basis, meaning it's literally there are no gains in the account. You just inherited all these individual positions from your mom or your dad and now, great, we have an IRA with a million bucks and a brokerage account with a million bucks. Well, it's a crystal clear answer there. I need you to pull from your brokerage account because you don't have to pay any taxes. It's literally like a Roth IRA it's all after tax, there are no gains.

Speaker 1:

Now, most of you don't have that situation. Most of you go. You know, I put a bunch of money into Apple or Microsoft or Amazon or Google or this ETF or mutual fund that's grown for me, which I like. I've got a healthy gain. So I don't know what to do. Do I pull from that first, or my IRA? How do I think through that? That's what I'm gonna do for you right now. So that's the kind of why there's no kind of black or white answer. Now you get that On to my next point.

Speaker 1:

Now, let's assume it's the opposite. You have $100,000 of a cost basis, meaning you purchased Apple for $100,000, or let's call it VTI, any mutual fund or ETF and now it's worth a million dollars in your brokerage account, or you have a $900,000 gain, okay. So some of you are like, okay, what do I do now? I've got my IRA and my brokerage account? Well, in this example, for you to understand it, I need you to be retired, so I'm forcing this person at 55 to stop working. Now a lot of you are like I don't want to stop, I want to do part-time income, or I don't have. You know, okay, so we're going to get into the nuance promise. I like doing this.

Speaker 1:

If you can't tell already, here are the big flags that I need you to be aware of before I tell you the answer and how to think through this. The big flag is how long is your tax planning window If you're retiring at 55 and we have a lot of time before you actually going to start withdrawing and doing Roth conversions and all this fancy stuff I talk about? If you're like, listen, I'm 55 and I've got plenty of time, I don't know how long I'm going to live, but let's assume age 90 or 95. I've got plenty of time. I don't know how long I'm going to live, but let's assume age 90 or 95. I've got a long tax planning window I have, from 55 until I decide I want to turn on Social Security. Call it 62 or 70. And then those RMDs are going to turn out 75. So I've kind of got you know, really, between, if you think about it, seven to 20 years to have this long tax planning window to do whatever I want, so I'm not killed by taxes in the future. Okay, so that's the reality. So imagine you're listening right now and you're 62, you might not have this long. So for you you might. It might actually make a whole lot more sense to pull from one account over another because you don't have this long tax planning window.

Speaker 1:

Now a lot of you are going, okay, yeah, now I'm starting to follow here. I get it it. So let's have some more fun. And if this does not make sense, go back one minute. Hear what I said again. I promise it will click and I do my best to make this sound like english, not portuguese.

Speaker 1:

Okay, so now what I want you to think about is this example here, and I've drawn it out for you. So look on my screen. If you're on youtube right now, you can see this. If you're on YouTube right now, you can see this. If you're listening on the podcast app, you can, of course, just hear this, which is let's assume you have a million dollars in an IRA today and you get 7% growth in 20 years, you're going to have to start pulling from this pre-tax account. Whether you want to or not, those are required distributions. You're on track for $3.8 million.

Speaker 1:

Okay, if you get 7% growth, look at this cool calculator here and in my academy, by the way, which I reference if you don't have $2 million or can't work with us quite yet because of the soft minimum and I say soft minimum because it's not exactly 2 million, but it's in that range I have my academy, and in my academy I mention resources like the one I'm showing you right now and how you can use it. So let's assume you got 6% growth. Well, now it's 3.2 million. What if you got 8% growth? Now it's 4.6 million. Let's assume you get 8% growth, you're going to be 75 with $4.6 million.

Speaker 1:

You're going to be forced to take out a certain portion of that. So I'm going to do an example for you right now. Your money is going to keep growing. I'm literally doing it on my calculator as we speak. You're going to be forced to take out about $175,000 at that time. Now, $175,000 adjusted for inflation, after taxes. Okay, so it's like 175,000 you're going to have to take plus social security plus, maybe a pension plus, maybe, you know, rental income, maybe multiple social security benefits. So now, all of a sudden, you're going to have a huge tax burden.

Speaker 1:

And a lot of you are like yeah, that's exactly why I'm trying to understand where I should pull from to optimize this stuff. So this is what I just want you guys to know you can play around with this tool and do this with your own money and it's pretty cool. Now, that's if you have a million dollars in IRA. Some of you might have a million dollars in a brokerage account. So I'm going to walk you through my example right now and you're going to finally understand how this all works. So let's assume brokerage account, million bucks, and you have a cost basis of 700,000. Okay, cost basis 700. You purchased it for 700,000. Stick with me. This is the real important part. Now, 300,000 of that million dollars is all gains. Let's just assume you bought Apple for $700,000. Now it's worth a million. Okay, now let's go along here.

Speaker 1:

If you decide that you want to live on your brokerage account, let's call him John John's 55, ira with a million, another brokerage million $700,000 cost basis 300 gains John's 55 going. I just want to optimize. Tell me what I need to do. What's the financial answer? Remove all the emotion. What do I do? Here's what I would tell John. I would say, john, if your money keeps growing, you're going to be killed in taxes in the future. And so, john, you're probably wondering right now oh, I should put for my IRA, because then it's going to reduce the amount of my future pre-tax balance because I'm withdrawing from it. And I'd say, john, you're correct. You're like okay, cool, that's pretty easy, I go, but don't do it. You're like I thought you said it was easy, I go. Yeah, it's easy, but don't do it. I don't want you to pull from your IRA just to minimize your future tax burden. I would rather you implement strategic Roth conversions, I would rather you live on this brokerage account and I'd rather you pay 0% taxes. I'm going to come to that in a second and then in the future, I'd rather you look at your pre-tax balance and be really happy because it's really low, because we moved a lot of it to Roth.

Speaker 1:

You're like why would you say any of this stuff? Well, here's why. Number one if you're 55, you don't have social security yet, so social security is not turned on. Let's assume you don't have a pension and once again in this example, I forced this person to stop working. They're not allowed to work any longer, and neither is their partner or spouse. So here they are in their incomes, really really low.

Speaker 1:

Some of you know this, some of you don't know this, but when you pull from a brokerage account, you can pay 0% in taxes up to the first $94,050 of taxable income. You're like what on earth did you just say? Let's just say you bought Apple stock for $10,000 and it grew to $100,000, and you have no other income. You bought it for 10, it grew to 100. That's a $90,000 gain. You can go pay 0% taxes on that. Now, most of you are not going to have zero in income because there's interest and dividends, and so maybe if we add all that up, there's 60,000 that you can actually pay 0% taxes on Anything above that. You pay at 15%. Most of you go oh, I just kind of thought capital gains on my brokerage account, 15% taxes. No, that's not how that works. Now, once again, that assumes there's no dividends or interest or anything like that. Now, once again, there's also a standard deduction and that standard deduction allows us of $29,200 to essentially add that on. So the standard deduction means that you can be really tactical here and literally generate north of $125,000 of tax-free income if you wanted to.

Speaker 1:

So let's go back to my example with John. John purchased Apple for $700,000. It's now worth a million. John could spend from 55 to 60, essentially living off of this Apple stock position and pay 0% in taxes. Some of you are like that's kind of like a Roth IRA. Then yeah, it can almost act like that, where he put after-tax dollars in. It's growing and you're paying 0% taxes on it.

Speaker 1:

Let me give you an example. Let's assume John's income is $20,000. You're like I thought you said he had to stop working. Yes, but he didn't listen to me and he decided he wanted to do something anyways. So he's working a job that's really low stress. He's bringing in 10,000 a year because he likes doing it. And now he's got dividends and interest for another 10,000. Okay, great. So 20,000 is coming in, once again 94,050. That's what we can essentially fill up without having to pay any amount in taxes on these gains. So 94,050 minus the 20,000. Okay, great, we've got $74 thousand fifty dollars that we can sell an Apple stock, pay zero percent in taxes and let that money grow for you. Pretty awesome Meaning when I say let the money grow, let your IRA grow for you.

Speaker 1:

So now you're living off of this Apple stock. Well, you do that after a few years and your brokerage accounts depleted, and so we need to make sure we're being intentional, letting that brokerage account get us until 59 and a half so we can live off of this IRA, which you can start pulling from at that time. So we need it to get us that timeframe. But we also want to execute Roth conversions. Well, when we move money from an IRA to a Roth, so you never pay taxes ever again on that. What I want you to know is you got to pay taxes today on that and it's not fun but it's important. Well, how are we going to pay taxes on that? We're going to use the brokerage account as well. So that brokerage account of a million dollars that I need you to last you through at a minimum 59 and a half, so that's when you can start pulling from your IRA. And I want you to also once again what I say at the beginning you've got your energy and health. You probably want to spend more. I want you to. I'm not saying don't Some of you, I think, have a misconception that I want you to just be so conservative and not enjoy your retirement. That's not the case. I want you to enjoy it. I just want you which is why I say I'm the meanest advisor to never run the risk of running out.

Speaker 1:

So, in this example, keeping income low paves the way for all these Roth conversions. What if it was the opposite? What if it turns out he bought Apple stock for $1,000 and it's worth a million Well, $999,000 of gains there. That's significant. We're probably going to need to do a balance of brokerage and IRA because if we're going to just live off of $200,000, for example, in a certain year, he's going to be paying a lot in taxes. Now, a lot is relative because we can do capital gains taxes, which is 15%, but if his income was low, he could pull from an IRA and pay 10% or 12%. So this is where that fine line comes in.

Speaker 1:

Hopefully this episode is helpful for you to understand it. So, for your situation, it comes down to size of capital gains and size of pre-tax balance. That's number one. Number two projected future tax brackets are going to go up, so they're relatively low right now. We might want to take advantage of that. Number three what is the duration of your tax planning window? So if John's 55, he's got 20 years until RMDs are going to kick in.

Speaker 1:

Can we take advantage of tax gain harvesting and pay it 0%, maybe the first few years, literally tax-free, and then do Roth conversions might be helpful and then, from there, start to go okay, how much would I love to spend Social security, rental income, pension optimizing withdrawals. Yeah, it's deeper from there. But today, hopefully, was really helpful for you to understand IRAs, brokerage accounts, where should I pull from? That's it for today's episode. It was a longer one, it was in depth, it was more of the weeds. I hope this was helpful. If so, please like this video and let me know.

Speaker 1:

Is this the type of content that resonates with you? I try to keep it as engaging as possible. If you want a holistic strategy to optimize your early retirement, that's what we do. If you want the academy to have access to the software and the other tools, with me as your guide walking you through it, you can of and the other tools, with me as your guide walking you through it, you can, of course, get that in the description of today's episode. That's all I got for you today. Love you, guys.

Speaker 1:

Thank you for listening to another episode of the Early Retirement Show. If you have a question that you want answered in a future episode, you can always go to my website, earlyretirementpodcastcom that's earlyretirementpodcastcom and you can go ahead and submit a question that I'll look to answer in a future episode. Thank you all for listening. Please do rate it, review it and share it with someone who you think would benefit from this information. If there's anyone out there that you know, I certainly appreciate it and I will see you all each week. Hey guys, it's me again. Please be smart about this. Nothing in this podcast should be construed as financial, tax or legal advice. Consult with your tax preparer or financial advisor before taking any action. This podcast is for informational purposes only.