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Retirement Income Strategies

By Rick Imhoff, CFP ®

Congratulations!  You finally made it to retirement.  Your social security benefits have started and maybe a pension.  You might even be working part-time to earn a few extra dollars and to stay involved in the work force for a few more years.  If all these sources of income cover all your expenses, then you can let your investment portfolio continue to grow for possible use at a later time.  But what if these sources of income fall short of what you need to maintain the type of retirement lifestyle you desire?    

If you will need to take withdrawals from your investment portfolio to supplement your other income, what is the best way to do it?  The answer depends on the type of portfolios you have, your current and estimated future income tax bracket, and the amount of the shortage you need to cover.     

Some advisors recommend taking withdrawals from your taxable accounts and let funds in tax deferred accounts such as Traditional IRA’s and 401(k) plans, or tax-free accounts such as Roth IRA’s, continue to grow tax deferred or tax free.  By doing so, you can sell certain assets from the taxable accounts to raise the additional cash needed to supplement your income.  Assets in a taxable account that are at a loss can be sold to provide the cash needed and to allow for the capital loss to be realized and deducted on your income tax return to offset any realized gain or reduce other taxable income earned during the year.

In this low interest rate environment, you may invest some of your taxable accounts in dividend paying stocks, the percentage allocation to which would depend on your risk tolerance.  There are several large, well-established companies paying a dividend rate that equal or exceed the interest rate paid on government securities, investment grade corporate bonds, and Certificates of Deposit.  In addition, most of these dividends are taxed at capital gains rate which makes them even more appealing.  These tax-favored dividends can be used to supplement your retirement income. 

You can also sell stocks that are over-weighted in your taxable account to reduce or eliminate investment concentrations.  If a gain is realized on the sale, it would be taxed at the more favorable capital gains tax rate instead of the ordinary income rates.  This strategy would help to reduce the risk in your portfolio from over-weighted positions and take advantage of the tax break on realized long term capital gains.

However, if you have accumulated a significant amount of your portfolio in tax deferred accounts, you may want to check on what tax bracket you may end up in at age 70 ½ when you are required to take a minimum distribution.  If that amount would put you in a higher income tax bracket, you may consider taking withdrawals from your tax deferred accounts now while you are in a lower tax bracket.  

Though your tax bill may be higher now in dollar terms, it would be at a lesser rate than later.  In addition, by taking distributions now, you may have a smaller balance in your tax deferred account potentially reducing the amount of your required minimum distribution when you reach age 70 ½ and maybe keep you in a lower tax bracket.  This strategy would take some additional calculations to see if it might make sense in your specific situation.