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For many retirees, the idea of retirement is synonymous with freedom. You can exercise that freedom by choosing to spend your days traveling, spending summers with the grandkids, or simply relaxing and taking it day by day without a harried schedule. However, the transition from a steady paycheck to a reliance on your own savings can be daunting. Without a clear strategy, the lifestyle you envisioned and saved for could be hard to maintain.

To help keep your summer plans and long-term financial health intact, it’s important to approach your retirement spending with tax efficiency in mind.

A Quick Look at the Standard Withdrawal Options

The standard advice can often look like this: spend your taxable brokerage accounts first, then your tax-deferred accounts (like traditional IRAs), and finally your tax-free Roth accounts. However, if you haven’t made any withdrawals from your traditional IRA by age 73, Required Minimum Distributions could unintentionally push you into a significantly higher tax bracket. This could also affect your Medicare costs or increase taxes on your Social Security. Another drawback is that if you’d like to move your money into a new vehicle earlier in your retirement (when you still have taxable accounts you’re pulling from), this could also add to your tax burden, so drawing from tax-free sources that year could help balance that income.

The other piece of standard advice is the 4% rule. This classic retirement rule of thumb is designed to help you determine how much you can withdraw from your portfolio each year without running out of money over a 30-year period.

The rule is straightforward in its execution*:

• Year One: You withdraw 4% of your total retirement nest egg. For example, if you have $1,000,000, you take out $40,000.
• Subsequent Years: You don’t take 4% of the remaining balance. Instead, you take the same dollar amount from the previous year and increase it by the rate of inflation, with the idea that the market will continue to make up for your withdrawals.

It’s important to be able to tailor your income to your specific needs from year to year, as you never know what the future holds, for the market or for you personally. And while these options are great starting points, they can lack flexibility and don’t account for years with larger spending (like when you want to go on that big European vacation!).

Strategies for Your Summer Travels and Beyond

When planning for seasonal spikes in spending, such as a summer vacation, an option that might appeal is a bucket strategy.** This involves dividing your assets into distinct buckets. An example of this looks like:

1. The Immediate Bucket (Years 1-2): This bucket should hold enough cash in high-yield savings or money market accounts to cover your lifestyle needs, including that big summer trip.
2. The Intermediate Bucket (Years 3-10): This consists of more stable investments like bonds or CDs that can replenish your cash bucket.
3. The Long-Term Bucket (Years 11+): These funds remain in assets geared towards long-term growth, with the goal of allowing your future wealth to continue to compound.

This is just one of the many ways to start thinking about how to construct your own tailored bucket strategy. You can also utilize a dynamic withdrawal strategy within this framework that allows for larger withdrawals when the market is performing well and uses those better-performing years to fund lifestyle changes or vacations.

However, moving assets between buckets can trigger unintended tax consequences if not coordinated with your overall strategy, so it’s important to consult with your financial professional about your goals and plans.

Why Planning Ahead in Pre-Retirement Matters

Thinking about where your income will come from once you stop receiving paychecks is something to consider sooner rather than later. Building your income plan out as many as five or ten years ahead of retirement can help you make some potentially impactful moves, such as:

• Roth Conversions: Moving money from a traditional IRA to a Roth IRA during lower-income years can create a pool of tax-efficient wealth.
• Tax Diversification: Ensuring you have a mix of taxable, tax-deferred, and tax-free accounts so you can choose the most appropriate source of income each year for your specific goals.
• Avoiding the 59½ Trap: If you intend to retire early, making a liquidity plan can help you avoid the 10% early withdrawal penalty of most retirement accounts.

Your Summer, Simplified

We can help you focus on your retirement goals and navigate the complexities of tax planning. By coordinating your withdrawals, managing your tax brackets, and maintaining a cash buffer for your lifestyle goals, you can confidently enjoy your summer plans.

Successful retirees plan for both building and utilizing their savings, so if you haven’t yet mapped out your retirement income plan, now is the time to consult with a financial professional. Let us help you tailor your financial situation to both your short and long-term goals for a happy summer and beyond.

Sources:

https://www.journalofaccountancy.com/issues/2026/jan/tax-efficient-drawdown-strategies-in-retirement/

https://www.usbank.com/retirement-planning/financial-perspectives/retirement-withdrawal-strategies.html

https://www.usbank.com/retirement-planning/financial-perspectives/managing-retirement-during-market-downturns.html

*No strategy can guarantee a profit or protect against loss.

**This strategy may utilize annuity contracts, which are long-term insurance products.

All investing involves risk, including the potential loss of principal. No investment strategy, including tax diversification or withdrawal “rules of thumb,” can guarantee a profit or protect against loss in periods of declining market values. Past performance is not indicative of future results.

This material was prepared for general informational purposes only. It is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. A Roth IRA conversion is a taxable event and may have several tax implications. You should consult your own tax, legal, and accounting professionals before engaging in any transaction.

If this strategy utilizes insurance products, such as annuities: Annuities are long-term insurance products designed for retirement. They are subject to fees, expenses, and surrender charges. All guarantees and protections are backed solely by the financial strength and claims-paying ability of the issuing insurance company.

Withdrawals are subject to ordinary income tax and, if taken before age 59 ½, a 10% federal penalty may apply.

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When you think about retirement income, Social Security might be the first thing that comes to mind. But many pre-retirees are realizing that Social Security was never designed to replace a full salary. In fact, it typically replaces only about 40% of pre-retirement earnings. To bridge that income gap, many who are considering annuities hesitate to follow through because of misconceptions about them.

Some concepts are often so culturally ingrained that we stop questioning if they are actually true, and annuities sometimes fall into that category. If you’ve heard they are too expensive, too complex, or that your money disappears when you die, it’s time to understand the facts.

Myth #1: “Annuities Are Only for People Already Retired”

The Reality: Annuities can be a powerful tool for savers, not just spenders. While immediate income annuities are known for providing a potential income stream in retirement, deferred annuities are designed for the accumulation phase. If you have already maxed out your 401(k) or IRA contributions for the year, a deferred annuity offers an additional vehicle for tax-deferred growth with generally no annual IRS contribution limits. By starting early, you can help your earnings compound over time before eventually converting them into an income stream when you decide to retire.

Myth #2: “Annuities Are Too Expensive and Too Complex”

The Reality: Annuities are only as complicated as you make them, and you pay for the protection you choose. The high-fee reputation often comes from complex products with multiple riders and additional benefits. However, many modern annuities have simple structures and are low-cost with nominal annual fees.

When evaluating costs, it can be helpful to compare the fee against the value of the risk you are offloading. Are you paying for market protection? A contractually required death benefit? Lifetime income that you can’t outlive? In many cases, these fees are intended to be competitive with other managed investment accounts that don’t offer the same benefits. In short, you get what you pay for.

Myth #3: “If I Die Early, the Insurance Company Keeps My Money”

The Reality: Your beneficiaries can be protected. A common concern regarding annuities is the potential for the total payments received to be less than the initial investment if the owner’s lifespan is shorter than anticipated. However, it is important to consider how different payout options and riders can mitigate this risk. While a “life-only” payout stops when you pass away, many modern annuity contracts can offer options like “period certain” or “joint and survivor” payouts. If you pass away prematurely, these are designed to deliver payments to your spouse or beneficiaries for a set number of years or for the rest of their lives. So, in addition to providing a stream of income while you’re alive, annuities can help protect your legacy.

Myth #4: “You’re Better Off Investing in the Market”

The Reality: Annuities and market investments serve different purposes. Investing in the stock market can be risky as you approach your full retirement age because while the market can offer potential for growth, it doesn’t offer a floor. Fixed annuities can help provide a hedge against market volatility by providing an income baseline that tends to fluctuate less if the market dips.

Like Social Security, think of an annuity not as a replacement for your portfolio but as one of the pillars of a comprehensive retirement plan. By covering your essential expenses like housing, food, and healthcare with consistent income from an annuity and Social Security, you can build a foundation of financial independence that helps provide the flexibility to invest other assets for long-term growth.

Myth #5: “My Money is Locked Up with an Annuity”

The Reality: Liquidity concerns with annuities are common, but liquidity and flexibility are built into many contracts. While annuities do have “surrender periods” (a set number of years you must wait to withdraw the full amount without penalty), many contracts are not entirely illiquid. Some allow you to withdraw up to 10% of the account value each year penalty-free. Once the surrender period ends, you have full access to your contract value.

Understanding Your Unique Situation

Just as a Social Security strategy depends on your unique birth year and goals, an annuity strategy depends on your specific income gap. In our current economic environment, an annuity can help provide clarity and help reduce the stress of market watching.

Ready to see if an annuity fits into your personalized retirement plan? Don’t allow fear or outdated myths to limit your options in retirement. Scheduling an appointment with our team could help strengthen your retirement strategy, so call us today.

Sources:

https://www.retireguide.com/annuities/myths/

https://www.investopedia.com/articles/retirement/08/annuity-mutualfund.asp

https://www.annuity.org/annuities/

https://www.annuity.org/annuities/common-mistakes/

Add disclosure- This information is provided as general information and is not intended to be specific financial guidance. The source(s) used to prepare this material is/are believed to be true, accurate and reliable, but is/are not guaranteed. Annuities are designed to meet long-term needs for retirement income. They provide guarantees of principal and credited interest, subject to surrender charges, and a death benefit for beneficiaries. This information is designed to provide general information on the subjects covered. Pursuant to IRS Circular 230, it is not intended to provide specific legal or tax advice and cannot be used to avoid penalties or to promote, market, or recommend any tax plan or arrangement. You are encouraged to consult your personal tax advisor or attorney. Although external indexes may affect contract values, the contract does not directly participate in any stock, bond, or investments. You are not buying any bonds, shares of stocks, or shares of an index. This presentation is not endorsed or approved by the Social Security Office or any other Government Agency. Withdrawals are subject to ordinary income tax and, if taken before age 59 1/2, a 10% federal penalty. Withdrawals will reduce the contract value and other benefits under the contract. SWG 5430433-0426

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