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Retirement Planning > Spending in Retirement

8 Steps to Help Clients Effectively Withdraw Retirement Assets

By Roger Wohlner

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What You Need to Know

  • How much money should your client withdraw from different retirement accounts and in what order? Here's how to figure it out.
  • Factors such as changes in the rules and in your client’s situation play a major role.
  • Your client’s tax situation is also a major factor to be considered.

As your clients enter retirement, one of the key things they will need your advice on is formulating a retirement withdrawal strategy: How much money should they withdraw from different types of accounts, when, and in what order? 

This is not a one-time task, but rather something to review with them on a regular basis. Here are some steps to get you started.

1. Look at the Whole Picture

As with most aspects of financial planning for your clients, developing a retirement withdrawal strategy should start with a look at their overall situation. This will include things like: 

  • Age
  • Marital status
  • Income and tax considerations
  • All potential sources of retirement income
  • Income needed to support their retirement lifestyle 

These and other issues will be primary drivers of your recommendations for a withdrawal strategy throughout their retirement years. 

2. What Are Their Income Needs?

These income needs will likely evolve over the course of their retirement years. Ideally they have a retirement spending budget. 

In their earlier retirement years, your client may be more active with travel and hobbies. As they get older this may slow down, but other expenses such as medical costs might increase. At some point, they may relocate and perhaps downsize from the family home, which will affect their spending as well. 

Your client’s income needs are not static and their spending in retirement should be reviewed on a regular basis. 

3. Review All Sources of Retirement Income

It’s important to review all sources of retirement income at your client’s disposal. These could include: 

  • Social Security
  • A pension
  • Retirement accounts such as an IRA or 401(k)
  • Stock based compensation from an employer
  • Taxable investment accounts
  • An interest in a business
  • Income from continued employment or self-employment
  • An annuity
  • A life insurance payout or an inheritance 

Looking at the various types of potential income streams and accounts that can be tapped will help you determine how much retirement income your client can potentially generate. 

4. Compare Expenses to Non-Portfolio Sources of Income

As a starting point, compare non-portfolio sources of income to your client’s anticipated monthly expenses, both now and how they might evolve over time. For most clients, the most common non-portfolio source of income will generally be Social Security. For some clients, this might also include a pension from an employer or perhaps a payout over time from selling their business.  

You will also want to work with your clients to divide their expenses into fixed and variable expenses. Ideally the client’s monthly payments from Social Security and a pension, if they have one, will cover all or most of their fixed expenses. 

From there you can determine how much your client will need from their retirement accounts and any taxable investments to cover the rest of their expenses to support their desired retirement lifestyle. 

5. Keep Cash on Hand

Many experts suggest that clients have a portion of their retirement savings in a bucket of low-risk, highly liquid accounts that covers one to three years of their retirement spending needs. This reduces the chance that they will have to tap into equities during a market downturn to fund their retirement spending needs. This will generally be their first source of retirement cash flow after income streams like Social Security.

As various accounts are tapped each year, the money should be used to replenish this cash bucket. 

6. Tax Considerations

Tax considerations don’t go away in retirement. As you know, taxes are an integral part of retirement income planning. The taxes associated with tapping different types of investment assets between taxable accounts and traditional retirement accounts should be a key consideration in determining the order in which retirement assets are tapped and in what order.   

Required minimum distributions represent a mandatory taxable withdrawal. The current age to commence RMDs is 72, but the House recently passed the Secure Act 2.0 which would increase the age to 75 over an 11-year period. 

For clients who do not yet need to take RMDs or who will need to take withdrawals for other accounts in excess of their RMDs, their tax situation is a major consideration in which account(s) to tap next.

Clients in their 60s, may be in a “gap period” before taking Social Security, prior to a pension kicking in and prior to the start of RMDs. During this period it can make sense to tap traditional IRAs and even consider doing a Roth IRA conversion while they are in a lower tax bracket in order to reduce the impact of RMDs in the future. They can also consider tax gain harvesting if they find themselves in a low capital gains tax bracket. 

Tax planning in the context of retirement withdrawals is a multi-faceted and ongoing exercise. What does your client’s income look like for the year in terms of any earned income or income from a pension or deferred compensation from a former employer? When will they claim their Social Security benefits? 

A review of the client’s tax situation for each upcoming year is an integral part of the process of deciding which accounts to tap and in what amounts each year. 

7. Determine a Sustainable Withdrawal Rate

There has been a lot written about the 4% rule and other rules of thumb in choosing a sustainable withdrawal rate in retirement. This isn’t to say any of these methodologies are right or wrong, but rather each client’s situation is different. Further, each client’s situation will generally change over time in terms of what is a sustainable withdrawal rate from their various accounts. With many clients living longer, their nest egg has to last longer, which might dictate a lower sustainable withdrawal rate. 

In some cases, your initial review of their sources of retirement income compared to their expenses to fund their desired lifestyle might reveal a potential shortfall over their life expectancy. If this is discovered early on or ideally as they approach retirement, your client has options including working a few years longer or revisiting their retirement budget to see if there are areas that can be scaled back without severely hindering their desired retirement lifestyle. 

Sequence of returns risk is a risk that clients could face if the market experiences a significant downturn in the early years of their retirement just as they start spending down their nest egg. This could severely reduce the size of your client’s nest egg if their assets are invested too aggressively. Advisors need to factor this risk into their client’s withdrawal strategy and into their retirement asset allocation. 

8. Review the Plan Annually

Your client’s retirement withdrawal strategy needs to be reviewed annually and any time their circumstances change. Their tax situation might have changed, there might be new rules enacted by Congress that could impact their withdrawal strategy or their personal situation could have changed. A major gain in the markets or a downturn could affect your recommendations for withdrawals in a given year. 

A life change such as the death of a spouse or a marriage for a single client will have a major impact on their spending needs. Likewise with a significant health issue.

Helping your client plan the best retirement withdrawal strategy to support their desired lifestyle is an ongoing process. Your clients personal situation will change over time, the markets will evolve and there will be changes in various laws and regulations that could have an impact. Your clients depend on you to guide them through this process to help ensure that they have the financial resources to support their retirement spending goals.

Roger Wohlner

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