Moving from Saving for Retirement to Spending in Retirement

As my friends and I prepare to enter the retirement phase of life, three questions come up in conversation:

1. How do I use my money in retirement?
2. How do I convert assets into spending money without running out of money?
3. Can I retire and not pay taxes?

Like most things, it depends; and no, I can’t avoid paying taxes. I will pay taxes as I convert my retirement assets to spending money. I repeat, I WILL PAY TAXES as I liquidate retirement assets. But I do have some ways of picking and minimizing the taxes I pay.

If I Google “Liquidating Retirement Assets,” I get 32 pages of search results, and there are as many opinions and conflicting conclusions as there are articles.

One article advises me to use taxable money first; another article recommends using tax-free and tax-deferred money first. I am advised to start taking IRA distributions at age 59 ½ AND to wait until 70 ½. Etcetera, etcetera. The differences are in the assumptions, and the assumptions are legion.

So, what’s the answer?

I can’t provide a general answer to a specific question, but I can use general questions to reach a specific answer.

1. What am I trying to accomplish with my money in retirement? Am I on track to do that? My goals are to protect against disaster, live comfortably in retirement, give some money to heirs, give some money to charity, and avoid/defer/minimize taxes while doing so. Notice minimize and defer taxes is 5^th on the list. I can prioritize each of the first four items by knowing WHEN I need money for it. I need money each month to pay the bills, but will I wait until I am gone to give money to the kids, grandkids, and charity, or do I want to do that while I am alive?
2. How much money will I spend on each of these priorities?
3. Where will the money come from? What are my sources of income, and what are the assets I can convert to spending money as needed?
4. Do I want to minimize/avoid/defer paying taxes? If so, I should organize my assets by the taxes I will pay when using them: tax-free, income tax, and capital gains tax.
   1. What is my income tax bracket now; between now and retirement, at retirement, and throughout retirement?
   2. Will my tax bracket increase/decrease throughout retirement?
   3. What income tax brackets will my kids/grandkids be in when they receive and use money from me?
   4. What income tax brackets will my charities be in when they receive and use money from me?
   5. Do I need to be concerned about federal estate taxes?

Being tax efficient in retirement requires a flexible process of asking and answering these questions periodically. We’ve created some spreadsheet tools that we use to answer these questions and then play “What if?”

• What if I get all my spending money from my IRAs?
• What if I only take IRA RMDs and get the rest of my spending money from my capital gains accounts?
• What if I live to 100?
• What if I earn 3% on my investments? What if I earn 10%

By the time I ask several what-if questions and make projections based on different assumptions (which I keep track of in my spreadsheet), I get a pretty good picture of my options and can start making some plans on how to generate spending money in retirement.

Please let us know if we can help you answer these questions. We’re happy to help.

The opinions expressed are those of Tony Muhlenkamp and are not intended to forecast future events, guarantee future results, or offer investment advice.

Investing involves risk. Principal loss is possible.