Planning Your Distributions After Retirement

Planning Your Distributions After Retirement

August 11, 2020

Assigning Your Money to "Buckets"

Many investors who are getting closer to retirement may worry about the impact of a sudden stock market drop. But while it's important to protect some funds from major market moves once you've left the workforce, remember that your retirement funds will need to sustain you for several decades or longer.

By allocating your assets to different risk "buckets," you can maintain future growth while helping make sure you have enough funds on hand to cover short-term expenses. For example, your short-term savings may be entirely in cash or money market funds that have no risk of loss, while your more aggressive long-term bucket may be invested 100 percent in stocks. The right asset allocation for you will depend on your account balances, your retirement budget, your retirement wishes, and even your projected lifespan.

Creating Guaranteed Income

The key to a sustainable retirement involves providing yourself with flexibility. If you retire with one or more sources of guaranteed income, like a pension or Social Security, you can use this income to cover your everyday expenses while reserving your lump-sum retirement funds for larger expenses.

Having a guaranteed source of income to cover expenses can prevent you from having to cash out funds in a down market. This flexibility can help you preserve your nest egg for the future. 

Sequencing Your Accounts

Not all retirement funds are created equal. Withdrawing from a 401(k) can leave you with a tax bill, while Roth IRA distributions are entirely tax-free. Balancing your withdrawals between these fund types can significantly reduce your tax bill. Often, it can make sense to withdraw from pre-tax funds like 401(k)s and traditional IRAs only up to the amount of your federal income tax deduction, supplementing your cash needs with tax-free withdrawals from a Health Savings Account or Roth IRA.

For example, a married couple that plans to spend $45,000 per year in retirement can withdraw $24,400 from a 401(k), using the standard deduction to completely offset this income, and then withdraw the remaining $20,600 from a Roth IRA. Through this approach, the couple will not owe federal income taxes on the $24,400 401(k) withdrawal (because of the standard deduction) or the $20,600 Roth withdrawal (because these funds aren't subject to federal income taxes).1

This means that if you haven't already been saving for retirement in both pre- and post-tax accounts, there's never been a better time to start. By having a healthy mix of funds that enjoy different tax treatment, you'll be better able to plan your distributions in the most tax-efficient matter.

Important Disclosure Information

The comments above refer generally to financial markets and not Bazis Young portfolios or any related performance. The content of this article should not be considered financial advice. The article is not intended to  offer specific investment recommendations and  is general in nature and should not be considered a comprehensive review or analysis of the topics discussed. This article is not a substitute for a consultation with an investment adviser in a one-on-one context whereby all the facts of the attendee’s situation can be considered in its entirety and the investment adviser can provide individualized investment advice or a customized financial plan. Opinions expressed are current as of the date shown and are subject to change. Past performance is not indicative of future results and diversification does not ensure a profit or protect against loss.  All investments carry some level of risk including loss of principal. Information or data shown or used in this material was received from sources believed to be reliable, but accuracy is not guaranteed. This information does not provide recipients with information or advice that is sufficient on which to base an investment decision. This information does not consider the specific investment objectives, financial situation or need of any particular investor and may not be suitable for all types of investors. Recipients should consider the content of this information as a single factor in making an investment decision. Additional fundamental and other analyses would be required to make an investment decision about any individual security identified in this report.

Bāzis Young Investment Group, LLC is a registered investment adviser with the Securities and Exchange Commission.  Registration as an investment adviser does not imply any level of skill or expertise. Any discussion of specific securities is provided for information purpose only and should not be deemed as investment advice or a recommendation to buy or sell any individual security mentions or to allocate assets in any manner discussed.

Asset allocation does not ensure a profit or protect against a loss.

Contributions to a traditional IRA may be tax deductible in the contribution year, with current income tax due at withdrawal.  Withdrawals prior to age 59 ½ may result in a 10% IRS penalty tax in addition to current income tax.

The Roth IRA offers tax deferral on any earnings in the account. Withdrawals from the account may be tax free, as long as they are considered qualified. Limitations and restrictions may apply. Withdrawals prior to age 59 ½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Future tax laws can change at any time and may impact the benefits of Roth IRAs. Their tax treatment may change.

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