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Withdrawal Strategies: Retirement Stages

Advisors can provide significant value to mature clients by focusing on their changing concerns as they go through the different stages of their retirement years
In two earlier withdrawal strategies articles for Elite Advisor Forum, we explored the value retirees receive by combining the goal of preventing income-tax-bracket creep over their retirement years and the goal of minimizing the government’s share of tax-deferred accounts.

In the first article, “Withdrawal Strategies: An Overview,” we explored the value retirees receive by avoiding income-tax-bracket creep that’s caused by the progressive income tax system in the United States. Retirees achieve this goal by paying the lowest dollar income tax expense over their entire retirement period. The challenge is that the short-term goal for most retirees is to pay no income taxes in the current taxable year. In the second article, “Withdrawal Strategies: Tax-Efficient Withdrawal Sequence,” we explored the asset location decision and the locations from which to remove assets to fund retirees’ lifestyles to minimize the government’s share of their tax-deferred accounts.

In this third article on withdrawal strategies, we’ll discuss the value that retirees receive from custom solutions to their changing concerns through various stages of their retirement years.

Retirement Stages and Related Retiree Concerns

Retirees have specific concerns that change during different stages of their retirement, and we view one’s retirement years as three distinct stages:

Stage 1: At Retirement

At this stage, retirees are concerned about the transition of funding their lifestyle cash flow from their earned income to funding their lifestyle cash flow from retirement assets. Some find this financial responsibility overwhelming, causing many to hire an advisor for the first time.

Stage 2: Early Retirement Years (Before Age 70½)

At this stage, retirees have adjusted to living independently from their previous earned income. They are seeking to make decisions on lifestyle, travel, medical care and Social Security withdrawal.

Stage 3: Later Retirement Years (After Age 70½)

At this stage, retirees older than70½ are concerned about addressing the annual requirement of taking minimum distributions from their tax-deferred accounts and the tax consequences of transferring assets to their heirs.

Services Advisors Can Provide to Address Client Concerns Through the Different Stages of Retirement

The following is a list of services that an advisor can provide to address clients’ concerns at various retirement stages. Please note that because each client’s situation is different, grouping services by stages is an art, not a science. Some services may be applicable to all retirees, but the timing within the various stages will vary from client to client.

Stage 1: At Retirement

  • Select an appropriate health care solution
  • Select a retirement home/retirement community
  • Determine final deferred compensation and stock option package
  • Evaluate pension rollover and profit-sharing assets from the employer’s plan
  • Develop a Social Security filing strategy
  • Evaluate asset protection issues
  • Manage net unrealized appreciation opportunities
  • Manage the exception for under age 59½ withdrawal penalties
  • Elect IRC Section 72(t) to avoid 10 percent penalty, if applicable
  • Manage the basis, if any, of both IRAs and qualified plans
  • Manage the qualified Roth distributions
  • Place expected high-appreciation portfolio assets in Roth accounts to provide the highest dollar amount for heirs
  • Review life insurance policies (the need for the coverage, ownership and  beneficiaries)

Stage 2: Early Retirement Years (Before Age 70½)

  • Manage the 10percentand 15 percent tax brackets
  • Defer IRA distributions taxed at 25 percent or higher
  • First, fund lifestyle with deferred compensation and taxable (outside of tax-deferred accounts) assets
  • Next, fund lifestyle with traditional IRA assets
  • Last, fund lifestyle with Roth IRA assets
  • Study Roth conversions to manage tax brackets, if possible
  • Finalize the decision to optimize Social Security filing

Stage 3: Later Retirement Years (After Age 70½)

  • Withdraw the annual required minimum distributions (RMDs) on traditional IRAs
  • Manage the 10 and 15 percent tax brackets
  • Fund lifestyle above RMD, Social Security and other income with high-basis outside assets (non- tax-deferred accounts)
  • Withdraw additional funds from the IRA to manage tax brackets
  • Update core estate-tax-planning documents to minimize income and estate taxes to transfer the highest dollar amount of assets to heirs
  • Consider transferring assets in excess of the amount needed to fund their lifestyle to heirs before death
  • Review the beneficiary and contingent beneficiary designations on non-probate assets
  • Establish a transition plan for the management of personal assets with either a revocable living trust or power of attorney
  • Review medical health directives

Retirees’ concerns change during different retirement stages as age, tax laws, health status and individual goals all come into play. Wealth managers can add significant value by helping clients address their specific concerns as they change during various retirement stages.  

BAM Advisor Services, LLC, a comprehensive service provider for independent Registered Investment Advisor firms across the country.