Step-by-Step Guide To Withdrawing Retirement Income

This is going to be most applicable for those wondering how do I withdraw money in retirement . It's pretty simple . When you are working , you have W-2 or you're self-employed and you pay yourself a salary , income is coming in the door and there's not a ton of tax strategy you can do to minimize your bill .

I mean , yes , you can do tax loss harvesting , you can have mortgage interest and itemize different types of deductions Like , yeah , there's things you can do , but it's not like there's a ton . The reality is when you retire , that's where the value lies , because that's when you can withdraw from certain accounts over others .

Maybe you have a brokerage account and it's got a big gain . Maybe you have all your money in a 401k and you're wondering should you convert some to Roth ? Should you withdraw more ? What about before Social Security comes in ? So there's more customization and that's where the value lies . So today is going to be a step-by-step guide .

I'm going to use a case study so that you can see a real example . Regardless if your numbers are similar , the same principle applies , so you don't have to go well , that's not me . I don't have that amount of money . How am I going to do this ? You could do the same thing if you had $10,000 .

So I don't recommend retiring with $10,000 , but to each their own . No , just kidding . So the point here is , guys , I want to keep these videos fun . I want to keep it entertaining . It's educational , fun , informative content .

Please don't go execute any strategy here without actually consulting with a financial advisor , tax preparer , a state attorney or if you are your own advisor . Just please be smart about this . Nothing should be construed as actual financial advice . Now I'm going to be hopping in . If you are listening on the podcast app , please continue to listen .

This is going to be equally effective for you , I promise . If you are watching this on YouTube because I post my podcast in video form on YouTube as well you can , of course , look at my screen and you're going to see what I'm working with . Now , this is a software tool . I talk about this often because software will make your life easier .

I am an Excel guy . I'm not amazing at a lot of things , but I'm pretty good at Excel . This beats Excel . I prefer a software like this because it's dynamic when you move one thing , it moves everything else in a seamless way . Now , yes , you can do that in Excel , so it's not like you need this , but I find it makes your life easier .

So the case study that we're going to go through today this is a couple and this couple currently has three children , and they are 51 and 49 . Their kids are from 14 to 18 and they we're going to call them John and Jane . This is a real couple that I work with . I'm just changing their names .

They have a property worth $3 million and they inherited that property and there's no mortgage on it . So they had a home . They sold their home . They now have $3 million in liquid assets , so net worth nearing $6 million , and they have a traditional 401k that's got $1.5 million . They have a Roth 401k that is $152,000 . They have a 457b .

What the heck is that ? It's like a 401k for certain types of employees $330,000 , mainly government employees . They also have a brokerage account . Brokerage account that's what I call a superhero account that has nine hundred and thirty thousand dollars now also inherited . So when they inherited that , there's no tax implications .

Meaning if , for example , I bought Apple stock for ten dollars and it went to a million dollars If I sold it , there's a lot of taxes . Versus if you inherit that money , there's something called a step up in basis . So now what happens is this couple doesn't have to pay any taxes 930,000 , what's in their superhero account . That's now the cost basis .

So the cost basis and the value are the same because they inherited it . So if this 930 grows to a million and they decided to sell , now there's taxes between 930,000 and a million dollars . Going on , they have a Roth IRA with 15,000 , hsa with 25,000 , and 146,000 in 529s . Now let me tell you about all their favorite foods .

No , I'm just kidding , I'm not going to bore you to death . So , going on here , this is a couple . They don't hate their jobs . They're 51 and 49 . They had loosely planned on retiring at 60 and 55 . So let's call it , you know , 10 years , five years , and they want to spend 11,000 a month in retirement .

But of course there's going to be healthcare and travel and college and stuff coming up . So maybe they wanna go to grad school Not gonna go through everything because today is a withdrawal episode , but here's what I want you to know when it comes to retirement withdrawals , there's a very , very simple way of looking at this .

Now , this does not work for everyone , because everyone's different Meaning .

If you bought one stock Microsoft and now it's worth 5 million and you bought it for 100,000 , yeah , this framework's not going to be ideal for you , but for most of you , this is going to apply , and I am going to give you an example , if you are that Microsoft person , because a lot of you are those people .

So the general framework is should we withdraw from something that's going to have a greater tax liability or a smaller tax liability ? Well , obviously we want to minimize taxes , but we don't want to get crushed later on .

So if you have a brokerage account , what that means is you have the opportunity to pay capital gains tax rates , which is more attractive than ordinary income tax rates . So if you could pay taxes at 0% , would you rather have zero or 10% , because that's the current lowest bracket for ordinary income .

Well , brackets are gonna change , but what we wanna do is go . If we could pay zero , I'd rather do that , which means for 99% of people , it makes sense to pull from a brokerage account where you can pay way less taxes than pulling from an IRA .

So brokerage number one is unless you have cash or money , that's just sitting there with no tax liability , and I encourage this for a lot of my clients . I'll say if you're retiring in the next year , let's have a certain amount of money set aside .

So , no matter what markets are doing , you know you're going to be able to travel and do everything you want to do and then , if markets do well , we're going to sell off enough so that you have another year's worth of income . We call it Ro reserves . Root is the name of the company that I work for . This is the name that we use .

So , with that being said , brokerage account number one unless you have cash , unless you have a pension , unless you have rental income , in which case maybe you don't need as much root reserves because you have other stuff that's bringing in income . Now , that's number one . Brokerage account Number two is going to be like an IRA , a tax deferred account .

As that keeps growing in the future , you're going to have RMDs required , minimum distributions . Let me show you what that means .

So in this software , when you click on retirement and I know a lot of you are listening to this , but same applies you click this button , retirement , go to cash flows , there's going to be a way for you to basically see what is your future required minimum distribution . So this person right now , this couple , they're 51 and 49 .

They're not worried about these RMDs because they don't turn on until age 75 . So in 2049 , their first required distribution would be $420,000 . Then it becomes 452 , then 485 , then 522 , then 562 . So they might have to be forced to take out like a million dollars when they're in their 80s .

Well , they might be like we don't need a million , we're living off of 10,000 a month now . If we have 120,000 a month after taxes , adjusted for inflation , we're good . Well , what you can see here is this is a problem . It's a good problem .

So a lot of people will say oh , if I'm going to have these big RMDs later , why don't I pull for my IRA first ? Because that way less is there later , so that RMD is not as big , and I go . The logic is beautiful . The issue is you're creating more tax liability today . If you pull from an IRA , that's more money that couldn't grow for you otherwise .

And this brokerage account , if we just let that keep growing , well , eventually you're going to have to pay taxes on it . So the large kind of value , the discrepancy here on what you should do how big are the gains in your brokerage account ? If you have some really minor gains , well , it might make sense to actually go .

You know what we're going to , let these grow and then in the future , when we determine it makes sense , we're going to sell a portion of this or we're going to actually use this to give to our children so they get to inherit it . And that's another step up in basis . Awesome . If there's some really big gains there , you might want to start selling .

Because the big issue I see is people go like this I don't want to sell because if I sell I'm basically locking in a loss . Or you know which ? Yes , if you have a million dollars and it's worth 900,000 now people don't wanna sell because it locks in a loss . Although what you're doing is you're now taking 900,000 and you can invest in whatever you want .

There's nothing keeping that 900,000 from going to 500,000 if that stock doesn't do well . And now the rest of your retirement is very different , so we always need to go . What's the risk reward ? The value of having a withdrawal strategy that's very intentional is you're minimizing your tax liability over your lifetime .

So if you're using a super duper , fancy tax strategy , what you can see on my screen here is here's an example of if you're optimizing how you withdraw your income over this person's lifetime , there would be 3.3 million fewer dollars that they essentially otherwise could have had .

Otherwise said , there'd be 4.1 million more dollars because they saved $1.3 million in taxes . So this is a type of software that you can go and play around with your own projections and see what's the value of doing this . Now , the deceptive thing with software is it doesn't know if you're going to be changing your mind . It's not dynamic .

So if you right now are listening going , okay , that sounds good , $4 million more , but like , how the heck does that happen ? Well , the way that this happens is if you're pulling from the right accounts and you're saving 10% in taxes . That's not the value . The value is you just save 10% in taxes . So now your portfolio can keep compounding way faster .

Let me give you another analogy . I had a client that really wanted to retire , but they didn't want to do nothing . They still want to do something . So some part-time income Now that was going to bring in anywhere from $20,000 to $30,000 a year .

And they came to me and said you're not going to be that happy , I'm only going to do this job that brings in $30,000 a year . I said , look , first of all , I'm really happy because if you brought in zero you'd still be okay , but you're missing the point . They said okay , explain .

I said if you bring in 30,000 a year , that's nowhere close to 300,000 , like when you were in your peak earning years and they're like I know , that's why I'm coming to you . I'm like well , you got to flip your mindset , because 30,000 a year , if you bring 30,000 in a year and your $3 million portfolio , I don't need to send you 100,000 .

I can send you 70,000 a year because you're bringing in 30 . Well , that's 30,000 more dollars . That stays in a $3 million account which is going to compound way faster . So if you get a 10% return on $3 million , that's $300,000 . If you get a 10% return on 2.7 , well , that's $270,000 .

So , every single year , if this person were to bring in $30,000 a year over 10 years , that's $300,000 . That they allowed me to not have to send them , which could have compounded where now , literally , it would be the equivalent of bringing in $600,000 , because that $300,000 over 10 years could easily double , and so compounding on itself .

That's the real value it's all about what's the pressure we can take off from the portfolio . So that's an analogy I'll share with a client who's worried about . You know , is it really going to help if I do part-time income ? And , by the way , I told this couple like hey , I don't even want you to do it , I only want you to do it if you like doing it .

So , from a withdrawal strategy perspective , if we get like a list , it's always like hey , what's going to minimize the liability ? Yes , if we pull from cash , there's no liability . So obviously it's a good option . But the risk is you pull from cash and now all of a sudden hypothetical here your Microsoft stock goes down to 30% in value .

Well , you'll be kicking yourself going why didn't I pull from my Microsoft stock when it was in a good position at the time ? So you're always going to beat yourself up in some way .

It's not like there's a perfect science to this General structure is pull from what's going to create the least tax liability today and then monitor over time , on an annual basis or throughout the year . Really , what's going to be most efficient For a lot of you it's pull from your brokerage account .

Use that to its full extent , because if you have 300,000 and that's going to get you three years worth of income in retirement awesome . That allows your 401k or IRA to keep growing and you don't pay taxes on it as it grows . It's tax deferred , so if there's dividends and interest coming in , you don't have to pay any taxes on that today .

And your brokerage account ? You would . Your Roth IRA that's the last account we ever want to touch . And here's what I see . A lot People will go why don't I pull from my Roth IRA ? Because there's no tax liability . And you just said two minutes ago pull from what's the lowest tax liability . Well , the Roth .

I was already taxed on that , so now when I take the money out , I don't pay any taxes . Shouldn't I do that ? No , the answer is no , because that's the best account for tax-free growth . You want that growing like crazy . So if we were to take from it , we're really stopping the chance of tax-free growth . But I tell this story only because it's important .

We're at a client that told me . They said , hey , you know , I ran through all the projections and I get why I should pull from Roth last , but it looks like I'm going to like never pull from it because I have enough money . My brokerage , my social security , my pension , my 401k yeah , it almost is like Roth .

I don't even see why I would ever pull from it . I said isn't that great ? And they go no , I said why not ? They said , well , I don't have legacy goals . I , I don't have three kids . I'm trying to leave a ton of money to like this case study example here . So how does that change for me ?

I said , to be honest , you should probably spend more money and they're like great . So like , should I do a portion from my 401k or my Roth ? And that example because they had no legacy goals , they weren't trying to leave assets to kids or heirs or foundations For them .

Like , yeah , you should use the Roth IRA and we should think about what's the best way and timing . Now , generally , you still want to do it last , but there's , you know , all these different ways to look at planning and everyone wants to say this is the right way or this is the right . It doesn't work that way .

So my step by step guide is yeah , the general framework is brokerage , then tax deferred accounts like IRA , 401k , then Roth last , but it needs to go deeper . If you have a significant concentrated position , if you have a lot of cash on the sidelines that has not been deployed , if you're going to sell a business .

So , if you're looking for more of a nuanced approach , use a software so that you can help plan or work with an advisor . Of course , this is what we love to do . I hope you guys like this video . If so , please , guys . What helps this show grow is your reviews . So please be as transparent as possible , not poppable .

I was thinking about a popsicle Recently . I've been not that you guys need the whole story , but I've been basically making orange juice fresh I know big deal and then I will freeze that and have that as a popsicle instead of the store-bought ones night and day . So , if you guys don't mind , please be as transparent as popsicable Terrible joke , I know .

Make fun of me later and that helps the show grow . And then , if you're , of course , watching on YouTube , like share , subscribe I want to help as many people as possible retire early . Thank you guys for helping me do that . See you guys next time . Thank you all , as always , for listening to the Early Retirement Podcast .

I love getting to host these shows and make different content for you guys every single week . I've not missed a single week in years and that is because I love getting to do this . Now , please be smart about this .

Before you actually execute any strategy that you see me talk about or hear me talk about , should I say Please talk to your financial advisor , your tax preparer , your estate attorney . Please be smart about this . None of this should be construed as financial advice . This is for fun , educational , informational purposes only . Once again , just quick disclaimer here .

Guys , please be smart about this . Appreciate you listening , as always , and you can , of course , submit a question on my website , earlyretirementpodcastcom , if you , of course , want me to address a specific case study or topic .

I will not promise I can get to it , but I respond to every single person and if I find it will be helpful for a lot of people , I will absolutely make an episode on it , at the very least give you some insight . That's it . Thanks , guys .