Creating retirement income: Making the most of your savings

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Creating a retirement plan is like mountain climbing. The goal is not only to reach the summit, but to get back down safely. In fact, more accidents occur during the descent. This is also true for retirement planning. Most people focus on building their account balance. They lose sight of the real goal: creating a retirement income stream.

One topic few think about is the tax consequences of that income. An important question to ask is, “How should you structure retirement income from different asset sources?”

Many experts recommend withdrawing from your non-qualified (taxable) investment accounts first, since these may be subject to capital gains versus ordinary income tax. The rationale here is that you can live off of after-tax assets and investments that may only be subject to capital gains taxes, about 15 percent, versus ordinary income tax rates, 10 percent to 39.6 percent.

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In retirement, types of income are important. Before retirement, your salary usually dictates your tax bracket and taxes may be out of your control. However, when you create retirement income, you need to pay more attention to marginal tax brackets. Consider your sources of savings: are they taxable, tax-free or tax-deferred? For example, to generate additional income, consider tapping a Roth account or brokerage account, which may be more effective than tapping your IRA because the tax consequences are less.

We advocate a tax strategy that allows diversification in income generation. Use ordinary taxable income sources first, up to the highest level of the lowest marginal tax bracket, and then tap your more “tax friendly” accounts for any additional needed income. By understanding the nuances of tax diversification, you can make decisions that maximize your retirement income and also create the best tax outcomes.

Robert Warner is executive vice president and managing director of Cleary Gull Inc. in Milwaukee.

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