A question that we are asked by many clients as they approach retirement is “How do we actually get income from our retirement savings?” Most people have spent several decades consistently setting money aside in retirement accounts, investment accounts, income properties, pensions, and with social security through payroll taxes. It is a huge shift to go from the accumulation stage into the withdrawal stage and blending all sources of income is part of the wealth management process.
Our approach for a client moving into the retirement phase is to view all the financial resources together and then design the best strategy to deliver cash flow in the amount and at the time that the client wants. We also incorporate current and long-term tax planning into the process; essentially this means following a plan to limit unnecessary taxation during both current and future years.
It then becomes our job to determine how much, if any, the client receives from Social Security or pensions and blend that with the amount received from other income sources like rental properties. Once we have these amounts, we build a strategy to incorporate available investment assets to deliver the remainder of the needed income through interest, dividends, and capital gains. We also determine which type of account (such as traditional IRAs, Roth accounts, or taxable accounts) should be used for withdrawal. Usually this determination rests on how much the client anticipates needing for irregular purchases in the near future, such as buying a car, and also a review of the account size and tax treatment of the various accounts that the client holds.
Most clients have spent their careers receiving reasonably consistent paychecks paid once or twice each month, and tend to view spending needs on a monthly basis, so when it’s time to deliver income, we usually accomplish that via a monthly direct deposit into their checking account.
Our goal is to help clients understand when and how much income is coming to them and to take care of many of the implementation details. For our clients who have been accustomed to collecting a paycheck, they typically end up in a place where income may be from various sources, but once monthly distributions begin they are receiving a retirement income stream that feels very familiar.
If this was far too much information, we understand! We just wanted to give you a window into the process we go through for our clients when converting retirement assets into retirement income.