The Art of Retirement Cash Flow

Part of the Oakland skyline is slowly vanishing as the demolition of the east span of the Bay Bridge continues. The bridge was built in the Great Depression. It was a “double decker” with two spans – western section connecting SF and Yerba Buena Island, and the eastern section to Oakland. The bridge closed for a month when the east span partially collapsed in the 1989 Loma Prieta quake. Construction for the new east span commenced in 2002. It is a single deck, and was the world’s widest bridge when it opened in September 2013.

Demolition of the old span will take four to five years – almost twice as long as construction took in the early 30’s. They’re essentially dismantling the old bridge, section by section, in reverse order. Why the complicated un-building process? Factors include engineering, safety and environmental. The high-tension pieces are like a highly strung bow of 50 million pounds of steel. You don’t simply cut it or you risk a nasty “boom.” Tension needs to be controlled. 80 year old steel doesn’t handle like modern steel. And you want to avoid contaminating the choppy bay waters below. Tearing down a bridge can be a dangerous art.

And so can converting your wealth into monthly paychecks in retirement that will last your lifetimes. Original instructions were simple –save early and be a smart investor. You shift at retirement and draw income. But how? Life’s complicated – costs of living rise, Uncle Sam wants a cut, an unexpected emergency, markets correct, lose your wingman, or your perspectives change. I’ll share four withdrawal strategies to discuss with your family and advisors.

Be flexible – Heard of the 4 percent withdrawal rate? It’s a standard for calculating how much to save (25 times your annual cash flow needed after pensions and SS) or the “safe” withdrawal rate for a 65 year old retiree (4 percent of your IRA accounts). However, be flexible. Most retirees spend less than they expect, and spending is not a straight line – often higher in the early years, then settle lower into a groove, then crank up like we do as we age (healthcare). What if your retirement is beyond 30 years, want a safety cushion or inheritance for heirs, or want “sure things” (what are CD’s paying now?), then a 2 or 3 percent factor may be prudent.

Fill tax brackets – Most dislike paying taxes and are taught to defer taxes (spend after-tax accounts first, then IRAs, and save Roth’s for last – see next note). But beware getting trapped with insufficient liquidity (and face a big repair bill, etc.) or significant tax increases from IRA required minimum distributions at age 70-1/2. Consider filling tax brackets in early retirement years. If you’re married, the 15% bracket runs from about $18,651 to $75,900, and the 25% runs $75,901 to $153,100. If your taxable income is $60,000 (or $130,000), then consider additional IRA withdrawal of $15,000 (or $23,000) and avoid creeping to the next bracket. Similar concept is when you need significant cash and only have IRA monies. Say you’re contemplating an RV purchase. Consider splitting tax years with IRA withdrawals in December and January, and/or finance a portion and payoff with future withdrawals.

Hit the Roth early? Conventional wisdom is reserve the Roth IRA for last, and pass it on to your spouse or your kids. (People generally do Roth’s when they believe tax brackets are higher when they withdraw than when contributed). But what if you want to gift to your kids now (versus inheritance), you’ve only got IRA and Roth money, and likely you won’t deplete wealth in retirement. (And ignore tax reform rumblings about 5-year withdrawals for non-spousal beneficiaries). Why would you take IRA monies, pay taxes, and gift your kids the balance? That’s expensive. Instead, consider withdrawing non-taxable Roth funds. You have more money to gift. And of course, consult your CPA on all tax matters.

Income is nice, but balance is better – Some thought the retirement ticket was owning real estate and collecting rent. Others focused on high dividend stocks or interest income. They make sense – they’re income-oriented. If you earn $20,000 on a $500,000 portfolio, that’s 4 percent. But if you’re getting the same $20,000 income ten years from now (don’t increase the rents, or rising expenses), then you’re losing to inflation. Hence balanced investing (diversification). On average, you may earn more than 4% withdrawals and can reinvest for future withdrawals. Hopefully, you’ve got a dependable monthly paycheck that grows with inflation, with less worry about the ebbs and flows of markets, interest rates, and sketchy tenants.

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