Broker Check

Income in Our Golden Years

February 06, 2017

As adults, we know the importance of saving for retirement. It’s really easy. Just set up an automatic withdrawal from each month’s paycheck and direct it into a retirement account. What becomes trickier is the amount we should be saving and how we should best invest it.

But what happens as we enter retirement? We’ve been saving money our entire lives. In theory, we know what’s needed–simply rely on savings, Social Security, and if we have one, a pension.

Put another way, we are in a transition period that moves us away from retirement planning to retirement income planning.

Over the years, I’ve had many clients and colleagues reach out to me as they recognize that the seemingly simple concept of relying on savings really isn’t so simple.

At this juncture, I could stuff this newsletter with facts and information, overwhelming many of you.

Instead, I want to provide a high-level overview of two key components of retirement income planning.

But let me emphasize–I would be delighted to answer any questions you may have. I am simply an email or phone call away.

Two key aspects

A couple of years ago, the American Institute of CPAs released the Q1 2015 AICPA CPA Personal Financial Planning Trends Survey. The Survey revealed that two prime retirement income planning concerns are (1) running out of money and (2) how to more efficiently and effectively tap into assets.

That shouldn’t be a surprise. “How much money do I have to live on each month?” is a common question. And, “Which accounts and in what amounts should I pull funds from?” comes up often.

Let’s start with the first question. Sources of income during retirement may include Social Security, assets, earnings from part-time work, earnings from an annuity, and a pension.

Social Security, a pension, and the annuity are reasonably stable. For most folks, however, it’s not enough to live on, and a lifetime of savings plays a key role in filling the gap.

Some of you are in a position to live off interest and dividends, only withdrawing principal for special needs. Many, however, must rely on carefully meting out and using much of their lifetime savings.

One approach is to employ what’s called a “sustainable withdrawal rate.” One common method is called the 4% rule, which some of you may have heard of.

Simply stated:  Withdraw 4% each year from your savings, an amount you may decide to keep constant or increase to keep pace with inflation.

This was once a helpful rule of thumb, but low interest rates have made it less than ideal for today’s retirees.

Let’s look at another scenario. We can always increase the annual withdrawal rate to 5% or more; however, if we raise it too high, there is the risk of running low or running out of savings.

Instead, you should consider a withdrawal rate based on your time horizon, asset allocation, and confidence level.

Questions we can consider include:

  1. How many years do you want to plan for?
  2. What asset mix between stocks and bonds are you comfortable with?
  3. What level of confidence do you want to have that your money will last?

A lower withdrawal rate will increase the odds the portfolio will last through your retirement years– that’s intuitive. But it also means less discretionary income.

This dilemma also illustrates the need to keep an eye on capital appreciation, especially in today’s low-rate environment. It’s why I’m likely to recommend that your portfolio includes a mix of stocks.

Of course, flexibility and ongoing monitoring are critical. This isn’t a “set and forget” portfolio. Adjustments can be made based on your personal situation. So, it’s important we monitor and modify as necessary.

Let’s move to the next question–withdrawal order. Which accounts should you tap first if your goal is to maximize spending during your lifetime?

  1. Let’s start with the required minimum distribution from tax-deferred accounts such as IRAs. At 70 ½ years old, the IRS requires that you take a minimum distribution each year. Miss it and you’ll pay a big penalty.
  2. Taxable interest, dividends, and capital gains distributions may be the next best source of income.

If additional funds are needed, your anticipated future tax bracket comes into play. Let me explain.

If we expect a higher marginal tax bracket in the future, withdrawing from the traditional IRA today may be the most advantageous choice. But be careful the distribution doesn’t push you into a higher tax bracket in the year you take it.

If you anticipate a lower tax bracket down the road, a Roth IRA may be the best option for today’s income needs. If cash is still needed or desired, then look to a traditional IRA.

However, there is one big advantage to leaving the Roth alone. You continue to take advantage of the tax-free umbrella the Roth provides. Or, you can hold on to the Roth for unexpected expenses.

Moreover, the Roth can be used as an estate planning vehicle because heirs may be able to sidestep federal taxes when withdrawing from it.

These are just a couple of ideas designed to provide you with the proper framework as you enter or gear up for retirement. It is a broad overview that’s designed to shed light on a situation that’s unfamiliar to many retirees.

Each situation is unique, which means there are many other aspects of retirement income planning that could be useful for your specific situation.

My door is always open

As I have stressed, I’m always happy to answer any questions or provide a more comprehensive review tailored to your needs. And as always, when it comes to tax matters, consult with your tax advisor.

Table 1: Key Index Returns




3-year* %

Dow Jones Industrial Average




NASDAQ Composite




S&P 500 Index




Russell 2000 Index




MSCI World ex-USA**




MSCI Emerging Markets**




Bloomberg Barclays US Aggregate Bond TR




Source: Wall Street Journal,, Morningstar

MTD returns: Dec. 30, 2016—Jan. 31, 2017

YTD returns: Dec. 30, 2016—Jan. 31, 2017


**in US dollars

Trumped up

A recurring theme you’ve heard from me is that stocks take their longer-term cues from what’s happening to corporate profits and expectations of corporate profits, how the economy is expected to perform (which support profits), and what’s happening to interest rates.

But shorter term, any number of events or issues can creep on to the horizon and create distractions. Recall when problems in Greece and Europe bubbled to the surface. It’s just one example.

Like an 800-pound gorilla, the dominant theme that impacted markets last month and since the election has been the impending Presidency of Donald Trump.

Before I go on, let me say that while the political discourse has been unusually bitter, I really believe that our differences as Americans are dwarfed by what unifies us.

That said, I recognize the obvious–Donald Trump is a controversial figure that elicits a myriad of opinions from Americans.

Injecting politics into any commentary has risks. We all have different viewpoints and filters and what’s said can be innocently misinterpreted. But I feel it would be a disservice to you to avoid any mention of Trump in this month’s letter.

My goal is not to praise or criticize Trump’s policies, only to view them through the narrow prism of the market, whether favorable or unfavorable. So let’s dig in.

Following his win, expectations of corporate and individual tax reform were among several policy prescriptions that fueled gains.

Moreover, regulatory reform and higher defense spending are expected to receive a warm reception from a sympathetic Congress. While Republicans have historically turned a cold shoulder to higher domestic spending, investors are still betting on some type of increase in infrastructure outlays.

Yet, we also have an administration that has railed against globalism and has shunned large, multilateral trade deals.

Markets like the former positions; they cast a wary eye on the latter, fearing the prospect of a damaging trade war.

However, early optimism has turned to caution. Few things move quickly through the halls of Congress. Competing interests seem set to slow down corporate tax reform. And Trump, who ran as a very unconventional candidate, has yet to shed his unorthodox ways.

I recognize his style appeals to some folks, but his more controversial initiatives and unorthodox ways have created some uneasiness among investors. In addition, there are concerns his pro-growth initiatives that fueled gains late last year could get bogged down in Congress.

I suspect we’ll eventually see tax reform. It’s a key policy initiative for the new President. Still, patience will be needed.

Elsewhere, themes that have supported shares during the long-running bull market remain in place. Economic growth has yet to abate and there are few signs from leading indicators that it will stall. Plus, corporate profits are rising (Thomson Reuters). And for now, the Fed maintains that any series of rate hikes are expected to occur gradually.

I hope you’ve found this review to be informative.

If you have any questions or would like to discuss any matters, please feel free to give my office a call at 781.236.0802.