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

Step-by-Step Guide To Withdrawing Retirement Income

• Ari Taublieb, CFP®, MBA • Episode 232

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This episode explores essential strategies for effective retirement withdrawals, emphasizing the importance of minimizing tax liabilities while maximizing fund growth. Listeners gain valuable insights into withdrawal frameworks, tax implications, and the role of technology in planning for a secure retirement.

• Understanding income and tax strategies while working in retirement 
• Examining a real-life case study on withdrawal methods 
• Importance of software tools in financial planning 
• Different accounts require distinct strategies for withdrawals 
• Implications of Required Minimum Distributions 
• Strategies to enhance wealth through intentional withdrawals 
• The role of part-time income in retirement planning 
• Tailoring withdrawal strategies based on individual goals 
• The significance of legacy goals in financial planning 
• Call for listeners to engage and share their feedback

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

Speaker 1:

Welcome back to the Early Retirement Podcast. This is gonna be a great episode for you if you're anywhere from one to five years out from retirement, or even if you're in retirement Now. If you're really into retirement planning and you are beyond five years out from retirement, of course you can still listen. But I wanna be transparent. This is going to be most applicable for those wondering how do I withdraw money in retirement. It's pretty simple.

Speaker 1:

When you are working, you have W-2 or you're self-employed and you pay yourself a salary, income is coming in the door and there's not a ton of tax strategy you can do to minimize your bill. I mean, yes, you can do tax loss harvesting, you can have mortgage interest and itemize different types of deductions Like, yeah, there's things you can do, but it's not like there's a ton. The reality is when you retire, that's where the value lies, because that's when you can withdraw from certain accounts over others. Maybe you have a brokerage account and it's got a big gain. Maybe you have all your money in a 401k and you're wondering should you convert some to Roth? Should you withdraw more? What about before Social Security comes in? So there's more customization and that's where the value lies.

Speaker 1:

So today is going to be a step-by-step guide. I'm going to use a case study so that you can see a real example. Regardless if your numbers are similar, the same principle applies, so you don't have to go well, that's not me. I don't have that amount of money. How am I going to do this? You could do the same thing if you had $10,000. So I don't recommend retiring with $10,000, but to each their own. No, just kidding.

Speaker 1:

So the point here is, guys, I want to keep these videos fun. I want to keep it entertaining. It's educational, fun, informative content. Please don't go execute any strategy here without actually consulting with a financial advisor, tax preparer, a state attorney or if you are your own advisor. Just please be smart about this. Nothing should be construed as actual financial advice. Now I'm going to be hopping in. If you are listening on the podcast app, please continue to listen. This is going to be equally effective for you, I promise. If you are watching this on YouTube because I post my podcast in video form on YouTube as well you can, of course, look at my screen and you're going to see what I'm working with.

Speaker 1:

Now, this is a software tool. I talk about this often because software will make your life easier. I am an Excel guy. I'm not amazing at a lot of things, but I'm pretty good at Excel. This beats Excel. I prefer a software like this because it's dynamic when you move one thing, it moves everything else in a seamless way. Now, yes, you can do that in Excel, so it's not like you need this, but I find it makes your life easier.

Speaker 1:

So the case study that we're going to go through today this is a couple and this couple currently has three children, and they are 51 and 49. Their kids are from 14 to 18 and they we're going to call them John and Jane. This is a real couple that I work with. I'm just changing their names. They have a property worth $3 million and they inherited that property and there's no mortgage on it. So they had a home. They sold their home.

Speaker 1:

They now have $3 million in liquid assets, so net worth nearing $6 million, and they have a traditional 401k that's got $1.5 million. They have a Roth 401k that is $152,000. They have a 457b. What the heck is that? It's like a 401k for certain types of employees $330,000, mainly government employees. They also have a brokerage account. Brokerage account that's what I call a superhero account that has nine hundred and thirty thousand dollars now also inherited. So when they inherited that, there's no tax implications. Meaning if, for example, I bought Apple stock for ten dollars and it went to a million dollars If I sold it, there's a lot of taxes. Versus if you inherit that money, there's something called a step up in basis. So now what happens is this couple doesn't have to pay any taxes 930,000, what's in their superhero account. That's now the cost basis. So the cost basis and the value are the same because they inherited it. So if this 930 grows to a million and they decided to sell, now there's taxes between 930,000 and a million dollars.

Speaker 1:

Going on, they have a Roth IRA with 15,000, hsa with 25,000, and 146,000 in 529s. Now let me tell you about all their favorite foods. No, I'm just kidding, I'm not going to bore you to death. So, going on here, this is a couple. They don't hate their jobs. They're 51 and 49. They had loosely planned on retiring at 60 and 55. So let's call it, you know, 10 years, five years, and they want to spend 11,000 a month in retirement. But of course there's going to be healthcare and travel and college and stuff coming up. So maybe they wanna go to grad school Not gonna go through everything because today is a withdrawal episode, but here's what I want you to know when it comes to retirement withdrawals, there's a very, very simple way of looking at this.

Speaker 1:

Now, this does not work for everyone, because everyone's different Meaning. If you bought one stock Microsoft and now it's worth 5 million and you bought it for 100,000, yeah, this framework's not going to be ideal for you, but for most of you, this is going to apply, and I am going to give you an example, if you are that Microsoft person, because a lot of you are those people. So the general framework is should we withdraw from something that's going to have a greater tax liability or a smaller tax liability? Well, obviously we want to minimize taxes, but we don't want to get crushed later on. So if you have a brokerage account, what that means is you have the opportunity to pay capital gains tax rates, which is more attractive than ordinary income tax rates. So if you could pay taxes at 0%, would you rather have zero or 10%, because that's the current lowest bracket for ordinary income. Well, brackets are gonna change, but what we wanna do is go. If we could pay zero, I'd rather do that, which means for 99% of people, it makes sense to pull from a brokerage account where you can pay way less taxes than pulling from an IRA.

Speaker 1:

So brokerage number one is unless you have cash or money, that's just sitting there with no tax liability, and I encourage this for a lot of my clients. I'll say if you're retiring in the next year, let's have a certain amount of money set aside. So, no matter what markets are doing, you know you're going to be able to travel and do everything you want to do and then, if markets do well, we're going to sell off enough so that you have another year's worth of income. We call it Ro reserves. Root is the name of the company that I work for. This is the name that we use. So, with that being said, brokerage account number one unless you have cash, unless you have a pension, unless you have rental income, in which case maybe you don't need as much root reserves because you have other stuff that's bringing in income. Now, that's number one.

Speaker 1:

Brokerage account Number two is going to be like an IRA, a tax deferred account. As that keeps growing in the future, you're going to have RMDs required, minimum distributions. Let me show you what that means. So in this software, when you click on retirement and I know a lot of you are listening to this, but same applies you click this button, retirement, go to cash flows, there's going to be a way for you to basically see what is your future required minimum distribution.

Speaker 1:

So this person right now, this couple, they're 51 and 49. They're not worried about these RMDs because they don't turn on until age 75. So in 2049, their first required distribution would be $420,000. Then it becomes 452, then 485, then 522, then 562. So they might have to be forced to take out like a million dollars when they're in their 80s. Well, they might be like we don't need a million, we're living off of 10,000 a month now. If we have 120,000 a month after taxes, adjusted for inflation, we're good.

Speaker 1:

Well, what you can see here is this is a problem. It's a good problem. So a lot of people will say oh, if I'm going to have these big RMDs later, why don't I pull for my IRA first? Because that way less is there later, so that RMD is not as big, and I go. The logic is beautiful. The issue is you're creating more tax liability today. If you pull from an IRA, that's more money that couldn't grow for you otherwise. And this brokerage account, if we just let that keep growing, well, eventually you're going to have to pay taxes on it.

Speaker 1:

So the large kind of value, the discrepancy here on what you should do how big are the gains in your brokerage account? If you have some really minor gains, well, it might make sense to actually go. You know what we're going to, let these grow and then in the future, when we determine it makes sense, we're going to sell a portion of this or we're going to actually use this to give to our children so they get to inherit it. And that's another step up in basis. Awesome. If there's some really big gains there, you might want to start selling. Because the big issue I see is people go like this I don't want to sell because if I sell I'm basically locking in a loss. Or you know which? Yes, if you have a million dollars and it's worth 900,000 now people don't wanna sell because it locks in a loss. Although what you're doing is you're now taking 900,000 and you can invest in whatever you want. There's nothing keeping that 900,000 from going to 500,000 if that stock doesn't do well. And now the rest of your retirement is very different, so we always need to go. What's the risk reward?

Speaker 1:

The value of having a withdrawal strategy that's very intentional is you're minimizing your tax liability over your lifetime. So if you're using a super duper, fancy tax strategy, what you can see on my screen here is here's an example of if you're optimizing how you withdraw your income over this person's lifetime, there would be 3.3 million fewer dollars that they essentially otherwise could have had. Otherwise said, there'd be 4.1 million more dollars because they saved $1.3 million in taxes. So this is a type of software that you can go and play around with your own projections and see what's the value of doing this. Now, the deceptive thing with software is it doesn't know if you're going to be changing your mind. It's not dynamic. So if you right now are listening going, okay, that sounds good, $4 million more, but like, how the heck does that happen? Well, the way that this happens is if you're pulling from the right accounts and you're saving 10% in taxes. That's not the value. The value is you just save 10% in taxes. So now your portfolio can keep compounding way faster.

Speaker 1:

Let me give you another analogy. I had a client that really wanted to retire, but they didn't want to do nothing. They still want to do something. So some part-time income Now that was going to bring in anywhere from $20,000 to $30,000 a year. And they came to me and said you're not going to be that happy, I'm only going to do this job that brings in $30,000 a year. I said, look, first of all, I'm really happy because if you brought in zero you'd still be okay, but you're missing the point. They said okay, explain. I said if you bring in 30,000 a year, that's nowhere close to 300,000, like when you were in your peak earning years and they're like I know, that's why I'm coming to you.

Speaker 1:

I'm like well, you got to flip your mindset, because 30,000 a year, if you bring 30,000 in a year and your $3 million portfolio, I don't need to send you 100,000. I can send you 70,000 a year because you're bringing in 30. Well, that's 30,000 more dollars. That stays in a $3 million account which is going to compound way faster. So if you get a 10% return on $3 million, that's $300,000. If you get a 10% return on 2.7, well, that's $270,000. So, every single year, if this person were to bring in $30,000 a year over 10 years, that's $300,000. That they allowed me to not have to send them, which could have compounded where now, literally, it would be the equivalent of bringing in $600,000, because that $300,000 over 10 years could easily double, and so compounding on itself.

Speaker 1:

That's the real value it's all about what's the pressure we can take off from the portfolio. So that's an analogy I'll share with a client who's worried about. You know, is it really going to help if I do part-time income? And, by the way, I told this couple like hey, I don't even want you to do it, I only want you to do it if you like doing it. So, from a withdrawal strategy perspective, if we get like a list, it's always like hey, what's going to minimize the liability? Yes, if we pull from cash, there's no liability. So obviously it's a good option. But the risk is you pull from cash and now all of a sudden hypothetical here your Microsoft stock goes down to 30% in value. Well, you'll be kicking yourself going why didn't I pull from my Microsoft stock when it was in a good position at the time? So you're always going to beat yourself up in some way.

Speaker 1:

It's not like there's a perfect science to this General structure is pull from what's going to create the least tax liability today and then monitor over time, on an annual basis or throughout the year. Really, what's going to be most efficient For a lot of you it's pull from your brokerage account. Use that to its full extent, because if you have 300,000 and that's going to get you three years worth of income in retirement awesome. That allows your 401k or IRA to keep growing and you don't pay taxes on it as it grows. It's tax deferred, so if there's dividends and interest coming in, you don't have to pay any taxes on that today. And your brokerage account? You would. Your Roth IRA that's the last account we ever want to touch. And here's what I see. A lot People will go why don't I pull from my Roth IRA?

Speaker 1:

Because there's no tax liability. And you just said two minutes ago pull from what's the lowest tax liability. Well, the Roth. I was already taxed on that, so now when I take the money out, I don't pay any taxes. Shouldn't I do that? No, the answer is no, because that's the best account for tax-free growth. You want that growing like crazy. So if we were to take from it, we're really stopping the chance of tax-free growth.

Speaker 1:

But I tell this story only because it's important. We're at a client that told me. They said, hey, you know, I ran through all the projections and I get why I should pull from Roth last, but it looks like I'm going to like never pull from it because I have enough money. My brokerage, my social security, my pension, my 401k yeah, it almost is like Roth. I don't even see why I would ever pull from it.

Speaker 1:

I said isn't that great? And they go no, I said why not? They said, well, I don't have legacy goals. I, I don't have three kids. I'm trying to leave a ton of money to like this case study example here. So how does that change for me? I said, to be honest, you should probably spend more money and they're like great.

Speaker 1:

So like, should I do a portion from my 401k or my Roth? And that example because they had no legacy goals, they weren't trying to leave assets to kids or heirs or foundations For them. Like, yeah, you should use the Roth IRA and we should think about what's the best way and timing. Now, generally, you still want to do it last, but there's, you know, all these different ways to look at planning and everyone wants to say this is the right way or this is the right. It doesn't work that way. So my step by step guide is yeah, the general framework is brokerage, then tax deferred accounts like IRA, 401k, then Roth last, but it needs to go deeper. If you have a significant concentrated position, if you have a lot of cash on the sidelines that has not been deployed, if you're going to sell a business. So, if you're looking for more of a nuanced approach, use a software so that you can help plan or work with an advisor. Of course, this is what we love to do.

Speaker 1:

I hope you guys like this video. If so, please, guys. What helps this show grow is your reviews. So please be as transparent as possible, not poppable. I was thinking about a popsicle Recently. I've been not that you guys need the whole story, but I've been basically making orange juice fresh I know big deal and then I will freeze that and have that as a popsicle instead of the store-bought ones night and day. So, if you guys don't mind, please be as transparent as popsicable Terrible joke, I know. Make fun of me later and that helps the show grow. And then, if you're, of course, watching on YouTube, like share, subscribe I want to help as many people as possible retire early. Thank you guys for helping me do that. See you guys next time.

Speaker 1:

Thank you all, as always, for listening to the Early Retirement Podcast. I love getting to host these shows and make different content for you guys every single week. I've not missed a single week in years and that is because I love getting to do this. Now, please be smart about this. Before you actually execute any strategy that you see me talk about or hear me talk about, should I say Please talk to your financial advisor, your tax preparer, your estate attorney. Please be smart about this. None of this should be construed as financial advice. This is for fun, educational, informational purposes only. Once again, just quick disclaimer here. Guys, please be smart about this. Appreciate you listening, as always, and you can, of course, submit a question on my website, earlyretirementpodcastcom, if you, of course, want me to address a specific case study or topic. I will not promise I can get to it, but I respond to every single person and if I find it will be helpful for a lot of people, I will absolutely make an episode on it, at the very least give you some insight. That's it. Thanks, guys.