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Common Retirement Questions: What Are My Sources of Income and Financial Assets?

A common retirement question is "What are my sources of income and what financial assets should I draw on first during retirement?" Read below for our expert's answer.
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Retirement Daily’s Robert Powell sits down with Dana Anspach from Sensible Money to tackle the 10 most common questions in retirement.

In today’s episode, Anspach discusses the common retirement question: What are my sources of income and what financial assets should I draw on first during retirement?

Anspach says that starting with a timeline is usually best. This timeline lays out the sources of income that come from non-financial assets. Things like Social Security, pensions, annuities, and deferred compensation plans are always factored in.

After everything is laid out, Anspach says that it’s time to solve for what needs to come from the other financial asset. “When we think of those, we group things according to tax treatment,” she says. “There's your non-retirement account. There's your tax-free sources of cash flow such as Roth IRAs or health savings accounts. Then there's your traditional assets: 403(b) plans, 401(k)s, and IRAs. Every dollar that comes out of those is going to be taxable.”

Anspach also mentions that not everyone needs to leave their traditional assets alone until age 72 as it depends on what would be more tax efficient. With that, she also expresses how she isn’t a fan of “rules of thumbs,” especially one that determines the order of accounts from which to draw money. “[The] rule of thumb comes from this traditional thought process that you should let your tax deferred assets grow within that tax deferred wrapper as long as possible,” Anspach says. “But when you actually chart it out in a spreadsheet that accounts for taxes, it is not always the right answer.”

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People that have a large source of taxable income from pensions or deferred compensation plans might wait until age 72 to begin their RMDs. However, people who don’t have that are encouraged to take money out earlier because it can often lower their RMDs. IRMAA - the income related monthly adjustment amount for Medicare premiums - also affects when people should take out money, according to Anspach. “The higher your modified adjusted gross income, the more you may pay in IRMAA premiums,” she says. “So it seems backwards, but sometimes taking money out of your retirement accounts early in retirement can actually reduce the overall tax impact that you're gonna experience later in retirement once you are age 70 and older.”

Another thing to keep in mind is the idea of doing what’s tax efficient in the current year, but also what creates tax equilibrium for the rest of your life. Anspach says that using a reasonable set of assumptions can help model out what tax rate or marginal rate someone's income is going to fall into. She reemphasizes that one size does not fit all and that determining tax efficiency is dependent on the individual’s situation.

Anspach wraps up by mentioning rental properties and the income that should also be factored in. “At some point, when those properties sell, there can be depreciation recapture, which can of course cause extra tax consequences,” Anspach says. “So just the timing of when you plan those things out can be important.”

Stay tuned for the next most common retirement question, where Anspach discusses whether someone should leave their 401(k) with their employer or roll it over into an IRA.

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