Expert strategies for withdrawing money in retirement

Summary

• Saving for retirement has become automatic through workplace plans and target date funds—but spending and withdrawing from retirement savings accounts requires much more personalized planning and strategic decision-making.
• From timing required minimum distributions to gifting a Roth IRA account in an inheritance, tax considerations heavily impact retirement withdrawal strategies.
• Annuities can cover essential retirement expenses like food, housing, and health care through a guaranteed lifetime income stream you won’t outlive.

The hidden challenge in retirement

When it comes to retirement planning, everyone wants an easy button. Nowadays there practically is one—at least for the savings piece of the retirement puzzle.

Auto enrollment and auto deduction have streamlined workplace retirement plans, helping to make saving more convenient and straightforward. Target date products such as TIAA’s RetirePlus and Nuveen Lifecycle Income Series now automatically do what investors once had to figure out on their own—knowing when to rebalance their portfolios and how to ratchet down risk as they near retirement age.

Unfortunately, there’s no easy button for decumulation the same way there is for accumulation. “There is more to it when turning on the faucet of income, especially when clients aren’t certain how much they need to live on,” says Joseph Goldgrab, a TIAA executive wealth management advisor in New York City.

Say a client has a million or so in savings, Social Security, some real estate, and maybe a small pension. It all looks good on paper. But then they retire—and suddenly they’re expected to know which accounts to withdraw from (and when) and how to make their money last for what’s truly an unknowable period of time. “Longevity amplifies the risks faced in retirement,” says James White, senior director of TIAA’s Retirement Income Consultants (RIC) team. “All things being equal,” he says, “someone with a shorter life expectancy should be able to spend more per year than a healthy person who expects to live to 90-plus and thus has more years of retirement to pay for. The question is how much more.”

So, what’s a retiree (or near-retiree) to do when it comes to crafting a proper withdrawal strategy? Clarity spoke with Goldgrab, White, and other TIAA financial professionals to get their top tips for clients transitioning from saving money for retirement to spending money in retirement.

1. Take advantage of high-tech financial planning tools available through TIAA.

If you’re a wealth client, make an appointment with your TIAA Wealth Management advisor. (If you’re a TIAA plan participant at or near retirement who doesn’t qualify for a wealth advisor, you can make an appointment with a member of the RIC team.) Using the latest tools, TIAA financial professionals will create a personalized retirement income plan that’s far more comprehensive than the old rules of thumb previous generations relied on for retirement withdrawals.

You may be familiar with common withdrawal strategies such as the 4% rule, the buckets approach, or systematic withdrawals. The difference between relying on those general strategies versus advanced retirement planning tools is a bit like the difference between driving from Boston to Washington, D.C., by staying on Interstate 95 the whole way versus using a navigation app like Waze. Staying on I-95 may be simple, but it’s not usually the best or fastest route. Nor will it help you bypass accidents, traffic, and road closures—the highway equivalents of down markets or unexpected medical expenses.

Your advisor will start with the basics: your financial data, risk tolerances, everyday expenses, retirement goals, legacy plans, and information on health and life expectancy. The tools then use Monte Carlo simulations to evaluate 500 different market scenarios. The end result is a retirement income plan designed to weather unpredictable market conditions, minimize taxes, and, potentially, leave legacies for heirs.

“Investors sometimes default to one strategy for simplicity’s sake,” says Lance Dobler, a managing director with TIAA Wealth Management’s Private Asset Management (PAM) unit. “But with so many variables we can now account for, even clients with less financial complexity benefit from using advanced tools.”

2. Be tax-smart about making withdrawals during the years between when you retire and when you have to start taking required minimum distributions (RMDs) at age 73.

The tax benefits of traditional or pretax 403(b)s and 401(k)s are twofold: Contributions are made with pretax money, and investments grow tax deferred. The downside comes when you have to start taking RMDs, which get taxed as regular income. (In 2033, the RMD age increases to age 75.)

RMDs start at approximately 4% a year at age 73—or $40,000 on $1 million in pretax accounts—rising to 8% by age 90 and 16% if you live to 100. “It’s a ticking tax time bomb that’s going to affect your federal tax brackets and your Medicare surcharge down the road,” says Evan Potash, a TIAA executive wealth management advisor in Newtown, PA.

For this reason, Potash suggests many newly retired clients to begin reviewing plans with their tax professional and start drawing down their pretax accounts even before RMDs kick in. He points out that wealthier clients often experience a big dip in their tax brackets during those interim years, especially if they’ve delayed taking Social Security. For example, someone with $500,000 in taxable income in their last year of working could have a quarter of that—or even less—in their first year of retirement. “They’re suddenly in their lowest tax bracket in years,” says Potash. Tapping pretax accounts earlier than required means early withdrawals get taxed at lower rates than they’d be taxed at later on. It also reduces the size of future RMDs—and RMD-related taxes—after clients turn 73.

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