The Landings & Bay Colony

17

Needsare essential expenses such as food, shelter, utilities
and clothing.

Wantsare discretionary expenses that let you maintain
your lifestyle, such as vacation spending, leisure activities
and luxury items.

Wishesare the objectives you aspire to beyond your basic
needs and lifestyle spending, such as leaving assets to
heirs or charity.

In addition to meeting your spending needs, your
retirement income plan should include a strategy for
preventing losses below a threshold that would cause
financial hardship or emotional distress. It’s also important
to maintain enough financial flexibility to deal with
unexpected circumstances.

Identify sources of income

During retirement, your income is likely to come from a
variety of sources, which can be challenging to assess.
Your income sources could include:

Pensions
Many defined benefit pension plans are being frozen,
terminated or restructured. As a result, personal
investments, including 401(k) plans, will have to provide
an increasing share of retirement income. Let’s identify any
pensions or 401(k) plans that aren’t already incorporated
into your retirement plan.

Social Security
While few of our clients intend to rely on Social Security
benefits as a primary source of retirement income, lifetime
benefits can be larger than you might expect: nearly
$600,000 on average for a couple who turned 65 in
2010 and significantly more for high earners with
longevity.3 The amount of your benefits is primarily
determined by when you begin receiving them, so it’s
important to have a Social Security strategy in place.

Earned income
You may leave your current job, but you might keep
working in some other capacity. The number of
Americans working after age 55 had gradually declined
over several decades to a low of around 30% in the early
1990s. Then that trend reversed. By 2008, more than 40%
of Americans continued working beyond age 55.4 Most of
them do so because they haven’t yet accumulated enough
assets to fully retire or because the value of their savings
declined with the market.

Create a retirement income plan

Once we’ve determined your retirement spending needs
and identified sources of retirement income, we can create
a formal plan. It should focus on balancing growth and
income in your portfolio, and for withdrawing assets at a
sensible rate in a tax-efficient manner.

Every situation is different, but in general, drawing down
your taxable investment accounts first may be preferable,
because those contributions were made with after-tax
dollars. The long-term capital gains tax rate you pay on
these assets will likely be less than the income tax rate that
you will face on most retirement plan assets, which, left
alone for now, can continue to potentially grow and
compound on a tax-deferred basis.

Consider a few distinct milestones:
• At age 55, you may start withdrawing from 401(k)s
without incurring the 10% early distribution penalty, as
long as you are no longer employed by the company that
sponsors the plan.

• At age 59½, you can begin taking penalty-free
withdrawals from traditional 401(k)s or any type of IRA.
You will owe income tax at your current income tax rate
(except on Roth IRAs and Roth 401(k)s, which allow tax-
free withdrawals as long as you had the account for at
least five years).

• At age 70½, you must begin required minimum
distributions (RMDs) from traditional IRAs or 401(k)s,
taxable at your current income tax rate. Roth IRAs do not
require minimum distributions.

Before you withdraw anything, we should talk about your
future goals. For instance, from an estate planning
perspective, you may find it preferable to draw down tax-
deferred savings first. Doing so could create beneficial tax
consequences for heirs, who inherit your taxable assets. Be
sure to include your tax advisor and attorney in these
discussions.

Sustainable withdrawal rates

When determining how much you can reasonably
withdraw from your accounts each year, we should base
the rate on your assets, expenses, expected lifespan,
inflation and portfolio return. For instance, we may find
that if you withdraw 8% of your total assets each year as
retirement income, those assets could last 20 years. Or we
might find that adjusting the withdrawal rate down to 4%

Planning Matters continued