Can You Pass This Retirement Quiz at Age 65? Let's Find Out
As more than four million Americans turn 65 this year, it's essential to approach retirement with a well-thought-out plan. Financial advisor Jung Seh of Bogart Wealth stresses the importance of having a cash flow withdrawal strategy in place before retiring at 65.
Balancing Tax Efficiency and Social Security Benefits
The best retirement withdrawal strategy at age 65 balances tax efficiency, optimizes Social Security benefits, and sequences withdrawals across different income sources to extend savings and minimize taxes.
Make Tax-Efficient Withdrawals
Start by withdrawing from accounts that have the least tax impact. Use savings accounts and money market funds first, then taxable brokerage accounts benefiting from long-term capital gains tax (0-15% rate). Follow this with traditional 401(k)s and IRAs which are taxed at ordinary income rates. Roth IRAs/401(k)s withdrawals are tax-free and often best preserved for later years.
Manage Social Security Timing
Although eligible at 62, delaying claiming Social Security benefits until full retirement age (FRA, often 66-67) or later increases monthly payments, providing a larger and inflation-adjusted income later. Claiming early locks in permanently lower benefits. Evaluate your personal needs and life expectancy to decide the optimal time to start benefits.
Limit Withdrawals from Pretax Retirement Accounts
Restrict distributions from traditional 401(k)s and IRAs to the amounts needed or to required minimum distributions (RMDs) after age 73 to avoid a higher tax bracket. Consider partial Roth conversions before RMDs start to reduce future tax exposure, keeping in mind that conversions are taxable in the year performed.
Create a Flexible Withdrawal Roadmap
Balance withdrawals from different accounts to reduce risk, consider market volatility, inflation, healthcare costs, and unexpected expenses. Integrate income sources (Social Security, pensions, savings, investments) to ensure sustainable and reliable income.
Additional Strategies
Delaying Retirement for Two Years
Can delaying retirement for two years provide additional savings, income, and the ability to collect full Social Security benefits? Delaying retirement until your full retirement age of 67 can help secure full Social Security benefits.
Harvesting Capital Gains Selectively
Harvest capital gains selectively to take advantage of lower tax rates when possible.
Working with a Financial Advisor
Working with a financial advisor can help model scenarios, optimize tax outcomes, and coordinate timing of withdrawals and benefits.
The Importance of a Wealth Plan
Establishing a wealth plan based on your vision of retirement, instead of going in blind and hoping to afford whatever you decide to do, is crucial. Without a plan, you could spend too much money in the early years of retirement or be too frugal at the start.
The period between 2024 and 2027 is known as "peak 65," with the same number of Americans reaching the milestone in these years. By following these key principles and additional strategies, you can maximize after-tax income, preserve wealth longer, and align with personal goals and tax laws affecting retirement income sources.
[1] IRS.gov, Traditional and Roth IRAs, https://www.irs.gov/retirement-plans/plan-sponsor/retirement-plans-faqs-regarding-iras-distributions-and-rollovers
[2] AARP, When to Take Social Security, https://www.aarp.org/retirement/social-security/info-2021/when-to-take-social-security.html
[3] IRS.gov, Roth Conversions, https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-roth-conversions
[4] Fidelity.com, Roth Conversions, https://www.fidelity.com/learning-centre/personal-finance/retirement/roth-ira/roth-conversions
[5] Investopedia, Capital Gains Tax, https://www.investopedia.com/terms/c/capitalgainstax.asp
- To maximize after-tax income during retirement, consider a defi withdrawal strategy that balances tax efficiency, optimizes Social Security benefits, and sequences withdrawals across different income sources like personal-finance savings accounts, taxable brokerage accounts, traditional 401(k)s, IRAs, and Roth IRAs/401(k)s.
- In addition to the defi withdrawal strategy, working with a financial advisor can help manage Social Security timing, limit withdrawals from pretax retirement accounts, create a flexible withdrawal roadmap, delay retirement for two years, harvest capital gains selectively, and align with personal goals and tax laws affecting retirement income sources.
