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The Art and Science of Retirement Spend-Down Planning

Retirement Planning Financial Planning Tax Planning Estate Planning

As many families as there are in the world, that’s how many different ways there are to enter into what we collectively call “retirement.” That said, there’s one baseline almost every retiree shares: None of us wants to run out of money before we’re through.

Crafting and maintaining your optimal retirement spend-down plan is an art and a science, balancing two opposing goals to generate one ideal lifestyle:

You want to maintain an unassailable financial safety net for as long as you shall live. (Both of you, if you’re a couple.) No cat food ever, for anyone but the cats!

At the same time, you’d like to comfortably convert your retirement goals into retirement reality, so you can savor the fruits of your labor.

We would suggest that the best “retirement planning” differs from the more typical approach of compartmentalizing accumulation and withdrawal planning into isolated silos. Making a mindset shift from paying the least amount of income taxes in any one year to losing the least amount of wealth to taxes over your lifetime is critical. This requires a comprehensive plan spanning across your Accumulation, Black Out, Spend Down and Legacy phases. Why not start much earlier, and more seamlessly position your assets for their greatest overall spending power throughout your lifetime?

You’re Never Too Young for Retirement Planning.

In other words, if you’re 30-something and thinking this article doesn’t apply to you, think again. There are a number of no-nonsense tax-management techniques you can employ today that your 65-year-old self will thank you for many times over.

During your working years, your best bet is to employ an evidence-based investment strategy with an inherently tax-efficient buy, hold and rebalance approach. This not only minimizes taxes along the way, but positions you to accelerate into spend-down planning at full tilt when the time is right. For example:

  • Accumulate growth in unrealized rather than realized gains.
  • Minimize income taxes through asset location (tax-efficient holdings in taxable accounts; tax-inefficient holdings in tax-sheltered accounts).
  • Accelerate income tax deductions during high-bracket years.
  • If you’re charitably inclined, consider establishing a donor advised fund, into which you’ll be able to make post-retirement gifts.

Skill Sets for a Successful Spend-Down

Even if you excelled at accumulating wealth throughout your life, spending it in retirement often requires a new or at least a revised mindset. The skill sets may be similar. But how you employ them and which details you choose to emphasize begins to shift toward these three key areas related to spending down your wealth:

  • Spending power – Continuing to position your portfolio for maximum spending power (especially during the “blackout period” after you retire but before RMDs kick in at 70½).
  • Legacy – Preparing for any legacy goals you may have.
  • Taxes – Managing tax ramifications throughout.

For example, here are some of the common questions we hear from families who are preparing for, or in retirement:

  • What can I do to ensure I don’t run out of money?
  • Do I have the most effective and efficient retirement plan in place?
  • How can I maintain my lifestyle in retirement?
  • How do I avoid getting locked into a high tax bracket for the rest of my life?
  • How do I manage my blackout period?
  • How do I make best use of the step-up in basis for a surviving spouse and/or my heirs?
  • How else can I maximize sharing wealth with heirs and charitable causes?
  • How can I minimize estate taxes?
  • How do I prevent my assets from falling into the wrong hands (ex-spouses, unjustified litigation, etc.)?

The Operative Word is PLAN.

One way to effectively address these questions and others is by having a written spend-down plan in place and regularly revisiting it, at least annually. Here’s a broad structure to kick-start your planning:

  • Define how much you expect your retirement lifestyle to cost (pre-tax). 
  • Analyze your behavior and monitor your progress in accumulating enough assets (financial capacity) to fund your desired retirement lifestyle.
  • Decide how you intend to draw your Social Security for optimum benefit.
  • Project the timing and amounts of taxable income you expect to receive – such as RMDs, pensions, rental income, partnership distributions and other taxable investment income.
  • Align your expected lifestyle spending (all of it, as touched on above) with generating the lowest tax costs on expected income and portfolio positions.

A Taxing Illustration

It may help to share a more tangible illustration of spend-down planning in action. Imagine you’ve got a decent amount of wealth to fund your lifestyle … but it’s not inexhaustible. With your stellar career largely behind you, your greatest wealth-preservation powers shift from earning capacity to tax-management techniques.

In other words, you may no longer be willing or able to make big bucks by working longer, harder or more profitable hours. But you can often continue to “earn” considerable amounts of money by aggressively eliminating unnecessary taxes and similar liabilities along the way.

So, let’s say you decide to withdraw $10,000 to fund a dream vacation. During your career, you’d have taken the $10K out of a taxable account. End of story. Now what, in retirement?

If you plan to sell a holding to free up the cash, will you or your broker consider how to minimize the capital gains involved? Better yet, if you’ll need to take a Required Minimum Distribution (RMD) before year-end, have you considered taking it earlier in the year? In doing so, you might avoid incurring two taxable transactions (one to free up the vacation cash and another for the RMD) when one might suffice. With a little spend-down planning, you can knock off two taxable birds with one tax-efficient stone!

Ready, Set, Retire.

Tax-effective withdrawals are just one example of spend-down planning in action. As you strive to make all the right spend-down choices at all the right times, your ideal plan touches on financial planning, investment management, tax preparation, risk management (insurance) and tax preparation activities alike.

As such, creating a personalized balance between a safe and satisfying retirement rarely happens by accident. Early and ongoing collaboration among your financial team players is critical to addressing the many, varied and significant details that inform your best life-spending decisions.

What other spend-down planning questions can we answer for you and your family? We’re available for a Cogent Conversation® anytime.