What Is Retirement Planning?

One of the most rewarding aspects of my job is helping my clients plan for and transition to a successful retirement. I work with clients from a wide range of personal and professional backgrounds, such as: corporate executives, real estate agents, widows and widowers, teachers, engineers, CEOs, professors, policemen, divorcees, TV directors, business owners, therapists, doctors, executive administrators, lawyers, nurses and retirees (or as some would like to be known, “semi-professional golfers”). They each have a unique set of dreams, personal goals and financial situations. As diverse as my client base is and regardless of their age, they all share one common characteristic: they would like to be able to retire with confidence and continue living the lifestyle they are accustomed to.

Retirement planning.For some clients the transition can be very smooth and for others it can be a challenge. For a vast majority of my clients, their portfolio was accumulated over decades. They accomplished this by living beneath their means and continuing to save and invest over a long period of time. As the wealth accumulated over many decades, my clients gained confidence and financial security. Now at retirement, some clients struggle with the idea of having to start drawing down from their portfolio after a lifetime of building it up. In addition, some clients have concerns about not only drawing down from their accumulated wealth, but also how to coordinate it with their other retirement income they may be entitled to such as Social Security, pensions and deferred compensation. Whether you are still working or retired, we can add value and peace of mind through our Retirement Planning process. Let me walk you through many of the areas that fall under the umbrella of what I would call “Retirement Planning.”

Retirement Projections for Pre and Post Retirement Planning

Whether you are planning to retire one day in the future, or are already in retirement, one way to analyze your financial situation is to take a deep dive into the details via a Retirement Projection. To initiate this process, we will sit down together and I will ask you to provide me with more details around your short-term and long-term financial goals. This will include putting some numbers together as to what your financial needs are now and how they may look in retirement. Some of the issues we will discuss and questions I will ask you are:

  • What are your annual expenses?
  • How much do you expect to pay for healthcare prior to retirement and in retirement?
  • How often do you buy a car and how much do you typically spend?
  • Do you expect to travel? If so, how often and what amount do you typically spend on vacation?
  • If you have minor children, are you saving for college, how much, and what type of university do you expect them to attend?
  • If you are still working, how much are you saving in tax deferred retirement options such as a 401(k)s, 403(b)s, Roth IRAs and IRAs and how much are you saving in your taxable accounts?
  • If you own a home, what types of extraordinary expenses do you foresee in the future such as a new roof, new A/C units, new windows, remodeling updates, or any other general ongoing home maintenance?
  • Do you have an interest in charitable gifting now or while in retirement?
  • Do you have adult children or grandchildren that you financially assist?

What types of income sources do you expect in retirement such as:

  • social security benefits
  • pension income
  • deferred compensation
  • real estate rental income
  • alimony
  • annuity income
  • working part-time in retirement
  • any potential inheritance
  • stock option proceeds, such as from RSUs or Non-Qualified Stock Options

Once I have all of the above data I will put together a detailed projection of your expected income, expenses and growth or drawdown of your investment portfolio from now through every year until your age 95 or 100. This detailed annual projection provides a great trend analysis of what the future may hold for you. Although there are a lot of detailed numbers within the projection, I am most interested in the long-term trend. Is your portfolio growing over decades, going sideways or depleting? If it is depleting quickly, what can we do to make a change in the long-term trend?

If we see a shortfall in the long run trend, there are usually 4 variables we can work with:

  1. You possibly work longer, or consider working part-time in retirement.
  2. You save more if still working.
  3. You spend less in pre-retirement or retirement. From a behavioral standpoint, the greatest impact you personally have over your retirement success is control over your spending.
  4. The last option, and one in which I do not usually recommend is that you invest more aggressively. I typically don’t recommend this as most of my clients can’t handle the excess risk that shows up during a bear market from having a more aggressive portfolio. Working longer, working part-time in retirement, saving more and spending less all have much greater impact compared to investing more aggressively.

4% Rule

For my clients that are in retirement and are in the “spend down” phase of their portfolio, you have probably heard me discuss the 4% rule. The 4% rule is a reference to a number of studies done over the years that have attempted to analyze and answer the question “what amount of your total portfolio can you withdraw consistently each year for the remainder of your life during all phases of bull and bear markets without depleting your portfolio?” Most of the studies have concluded that the maximum comfortable withdrawal rate is no more than 4%.   Keep in mind this is the amount derived only from your portfolio. This does not include social security, pension income, real estate rental income, deferred compensation, alimony, annuities, or any other form of additional retirement income that you are entitled to. Here is what a 4% withdrawal rate looks like based on a handful of different sample sized portfolios:

Portfolio Size 4% Annual Withdrawal 4% Monthly Withdrawal
$250,000 $10,000 $886
$500,000 $20,000 $1,667
$1,000,000 $40,000 $3,334
$2,000,000 $80,000 $6,667
$5,000,000 $200,000 $16,667


You can put your retirement at risk if you have income needs from your portfolio well above 4%. I know some of you are saying that 4% seems low and you are asking why you can’t spend more if your long-term target rate of return is expected to be greater than 4%. That’s a great question. The reason is, this is also the maximum rate of withdrawal that will provide you with a high probability of being able to safely weather all bear markets and allow for a lifetime of withdrawals to age 95. It is easy to survive on a 4% or greater withdrawal rate when markets are stable or moving up. Where this always catches up with clients that spend too much is during significant stock market downturns.

Let me provide you with an example. We typically experience a bear market every 5 to 7 years and it is not uncommon for the stock market to lose 40% during a bear market. A globally diversified portfolio will probably temporarily lose ½ of that, or 20% in a decent downturn. So let’s assume you had $1,000,000 heading into a bear market, you suffer a downturn of 20%, and you now have $800,000. Prior to the bear market you followed my advice and maintained a 4% withdrawal rate or $40,000 per year. The bear market has caused your withdrawal rate to now increase to 5% instead of 4% ($40,000 withdrawal divided by your new lower portfolio amount of $800,000). History has shown that your portfolio will usually recover from such a temporary loss.

Now let’s assume a more extreme spending example. Let’s say your withdrawal rate is 6% today, or $60,000 on a $1,000,000 portfolio. If you temporarily lose 20% due to a bear market, your withdrawal rate now increased to 7.5% ($60,000 divided by $800,000). It is difficult for your portfolio to rebound back to where it started as it now has to grow much higher than your annual 7.5% need from the portfolio. This will likely lead to a permanent loss of capital as each successive downturn in the market will cause your withdrawal rate to continue increasing due to your portfolio’s inability to fully rebound.

Coordinating Income from Your Portfolio in Retirement

During your working years, you became accustomed to receiving a paycheck every week, two weeks or month. My job is to help you “recreate” your paycheck in retirement so that we make the most efficient use of your portfolio and other income sources to match your ongoing lifestyle expenses. It is common that in retirement we set up a similar paycheck distribution system for you as that is what you are likely used to. Monthly seems to be the most common option as most of us pay bills on a monthly interval.   For some clients, however, we also consider quarterly or annual distributions. It really just depends as to what works best for your situation.

Through our retirement planning process I will be able to determine how much you will need to draw down each month from your portfolio and coordinate that with any other retirement income sources you may have.

Net Worth and Tax Returns

Two key components of the retirement planning process are my annual calculation of your net worth and my ability to reference your annual tax return. Your net worth is the combination of all of your assets (not just your portfolio) less any debt or liabilities. A successful retirement is not just the management of your portfolio relative to your income needs, but it is also the management of your overall asset and liability picture. Generally we want to see your total assets increase and total debt decrease over time. If debt is heading in the opposite direction and continues to increase, it may be a sign we need to take a closer look at your annual expenses.

At the end of the 1st quarter of each year I send a mailing out to you along with your first quarter portfolio statements. Enclosed in the mailing is a rough draft of your net worth statement with areas highlighted in yellow for you to update and return to me. In addition, to the net worth update request, I also ask for a copy of your latest tax return. I purposefully send this request out at the end of the first quarter as it coincides with when your tax return is likely being completed. Please note that I am not a CPA and the purpose of my tax return request is not to double check the work of your accountant. However, your tax return does provide me with a general overview of your income tax exposure and marginal income tax rate, which helps me greatly when planning for any annual tax loss harvesting from your portfolio, determining what type of investments will be purchased ongoing in any taxable or non-retirement accounts and what your tax picture may look like throughout your working years and/or in retirement.

Whether you utilize a CPA or Turbo Tax, you will likely be able to send me a pdf of your tax return. Your CPA can email me a pdf copy directly or provide it to me in some other electronic fashion as long as you provide him/her with permission to do so. Another option is to mail me a hard copy with the return envelope provided in your 1st quarter mailing.

Social Security and Medicare Planning

There has been a lot of talk recently in the media about when is the best time to start Social Security. You can start as early as age 62 or delay it until as late as age 70. One of the benefits of delaying Social Security is that you will receive an 8% increase annually for every year you delay it. Delaying Social Security can be a good longevity insurance plan if you have concerns about outliving your portfolio. However, that needs to be balanced with the fact that you may be putting more drawdown pressure on your portfolio in the earlier years of retirement by delaying Social Security to a later age. Like many things in life, your decision about when to start Social Security will likely depend on your particular financial circumstances, as there is not a one size fits all answer. If you have any questions about this issue, let me know and we can look at this in more detail in our retirement planning process.

Approximately 90 days prior to turning 65 you will be eligible to enroll in Medicare. There are numerous health plan options related to your Medicare choices. Everyone has a unique health situation and the choices can be overwhelming. I have a health insurance contact who is a true expert with all of the various Medicare health plan choices. I have referred a number of my clients to him to help them with choosing the best Medicare health plan relative to their particular health situation. If you need help with making this choice, or you need to determine if there is another plan that may be a better fit for you, let me know and I can provide you his contact info.


As you can see from above, retirement planning is an ongoing process that starts with your personal financial goals and encompasses a wide range of financial issues from your portfolio, to your retirement income options including Social Security, net worth, tax situation and healthcare/Medicare options. Please contact me if you would like to discuss your retirement planning goals further. Together we can put in place a strategy that will allow you to maintain confidence and peace of mind throughout your retirement years.

IRA Required Minimum Distributions (RMDs)

The IRS incentivizes investors to make tax deductible contributions to a number of different tax-deferred accounts such as an IRA, 401(k), SEP IRA, SIMPLE IRA or 403(b). For many investors this is their primary way of saving for retirement. The IRS allows the tax deduction on initial contribution and the continuous tax-free compounding of growth until distributions are taken or required. Any withdrawals in retirement are taxed as ordinary income for federal and state taxes if applicable. If you initiate a withdrawal prior to age 59 ½, not only will you pay taxes on the distribution, but you will also have to a pay a 10% early withdrawal penalty.

When do I have to start Required Minimum Distributions (RMDs)?

Once you reach age 70 ½, the IRS requires that you begin taking a mandatory distribution on a yearly basis from your tax deferred account. You didn’t think the IRS would let you keep deferring taxes forever did you? If it’s the first year of distribution, you can take the withdrawal by April 1st of the following year after you turn 70 ½, but you would have to take two distributions in this second year. Most investors take the distribution in the initial year so they do not have as large of a taxable distribution by waiting until the second year to start taking RMDs.

How do I determine the amount of my RMD?

The IRS has a life expectancy table which I have reproduced below. (Note, this is one of three types of life expectancy tables. The other two tables relate to inherited IRAs and if you have a spouse more than 10 years younger than you. For illustration purposes, the table below will apply to most investor’s financial situations. However, you should consult your CPA and fee-only financial planner to help you with the RMD calculation). The amount of your RMD is based on dividing your previous year’s 12/31 account balance by the “Divisor” in the table related to your age. For example, let’s assume you are turning 70 ½ in 2016. You would take your IRA or other tax-deferred account balance as of 12/31 of the prior year, 2015 in this case. Let’s assume it was $100,000. You then divide this by the “Divisor” factor of 27.4, which equals an RMD of $3,649.64.

Age Divisor % Withdrawal Age Divisor % Withdrawal
70 27.4 3.6% 86 14.1 7.1%
71 26.5 3.8% 87 13.4 7.5%
72 25.6 3.9% 88 12.7 7.9%
73 24.7 4.0% 89 12.0 8.3%
74 23.8 4.2% 90 11.4 8.8%
75 22.9 4.4% 91 10.8 9.3%
76 22.0 4.5% 92 10.2 9.8%
77 21.2 4.7% 93 9.6 10.4%
78 20.3 4.9% 94 9.1 11.0%
79 19.5 5.1% 95 8.6 11.6%
80 18.7 5.3% 96 8.1 12.3%
81 17.9 5.6% 97 7.6 13.2%
82 17.1 5.8% 98 7.1 14.1%
83 16.3 6.1% 99 6.7 14.9%
84 15.5 6.5% 100 6.3 15.9%

Source: IRS Publication 590

For fun I added a third column which converts the “Divisor” into a “% Withdrawal” to better show the impact of the RMD increasing over time. At age 70 ½, the “Divisor” requires a relatively small distribution, equivalent to approximately 3.6% of the tax deferred account balance. But as you see above, the “Divisor” goes up each year of age thereby increasing the withdrawal rate as a percentage each successive year. By age 80, the “Divisor” is 18.7, equating to a withdrawal rate of 5.3%, and at age 90, the “Divisor” is 11.4, equating to a withdrawal rate of 8.8%. The withdrawal rate continues to increase with age as the IRS wants to make sure it is receiving tax dollars in exchange for all those years of tax deferral!

Should I take the distribution all at once?

You have options for the withdrawal. It can be taken in a lump sum or over a period of time within the year of each RMD. If the required amount is relatively large, you could pro-rate the distribution and withdraw funds monthly over the course of a year. Since most people pay their bills monthly, this may help to provide a consistent income stream on a month-to-month basis and allows the funds to remain invested in your IRA/tax deferred account and potentially grow for as long as possible.

What if I have more than one IRA or tax deferred account?

Typically each separate account will require an RMD. There are situations where you can take one distribution from one IRA to cover for multiple IRAs and meet the RMD requirement for all of your IRAs. However, you should consult with a fee-only financial advisor and/or your CPA to make sure you are taking the appropriate RMD if you have multiple tax deferred accounts.

What if I forget to take my RMD withdrawal?

The IRS imposes a 50% penalty on any RMDs not taken. This is the stiffest of any IRS penalties. This penalty is in addition to any ordinary income taxes you will owe on the distribution. Most investment custodians do a good job reminding their investors of the annual RMD. However, if you do happen to miss an RMD, you will want to consult your CPA as special forms need to be filled out and submitted to the IRS when catching up on any missed RMDs.

What if my income needs in retirement are greater than the RMD?

You can always withdraw more than what is required by the RMD. A higher withdrawal amount will generate more ordinary income taxes. If you have taxable assets, you may be able to take a portion of withdrawal from this source to complement the RMD as taxable assets are typically taxed at more favorable capital gains rates versus ordinary income tax rates.

Every investor has a unique tax situation. Your comprehensive financial planner can coordinate and recommend the best combination of withdrawal amounts between your tax-deferred and taxable accounts, in addition to coordinating this with your Social Security benefits, pensions, deferred compensation, rental income, or any other sources of income you may have in retirement. Your fee-only certified financial planner can also ensure you are on track for a successful retirement.

Using Your IRA as Part of Your Wealth Transfer Legacy

I’d like to thank Michael J. Garry, CFP®, JD/MBA for today’s post about Using Your IRA as Part of Your Wealth Transfer Legacy. Michael is a Certified Financial Planner practitioner (CFP®) and financial advisor in Newtown, PA. His firm, Yardley Wealth Management, LLC, performs comprehensive financial planning and in-house investment management.  I highly recommend if you’re in that area you reach out to Michael for further financial tips and help!

One way of extending the life of your wealth through generations is by implementing a stretch IRA strategy. By designating the beneficiaries with the longest life expectancy the IRS will have lower imposed required minimum distributions for the inherited IRA. The asset base that is left is larger which will help it grow more quickly.

Factors to Consider

It is important to take into account important factors before making this type of decision:

  • If you need to withdraw more than the RMD amount, review how much the projected remainder of your IRA will be in the future.
  • If you are married, and wish to implement this strategy, but list your spouse as the primary beneficiary and then, those in later generations as secondary beneficiaries.

When making the choice to implement this strategy, you name one or more individuals with the longest life expectancy as beneficiaries. Ideally, you would take only the required minimum distributions during your lifetime. This will leave the largest remainder possible to grow tax-deferred while you’re still alive.

Distribution Options for Beneficiaries

Depending on whether your beneficiaries are spousal or non-spousal and whether or not you had begun taking RMDs, beneficiaries will have several options for distribution from their inherited IRA.

They may include:

  • Taking a lump sum.
  • Transferring the account balance to an inherited IRA with a five-year time limit to start distributions.
  • Transferring the account balance to an inherited IRA that will distribute assets according to the beneficiary’s life expectancy.

Spousal beneficiaries have the additional option of requesting a spousal transfer, which allows them to roll over the account balance into an IRA in his or her own name.

The Benefit of a Roth IRA

Roth IRA contributions are not tax-deductible, your investments grow tax-free, earnings can be withdrawn income-tax-free if you’re at least 59½ and have had the Roth at least five years, and there are no RMDs at age 70½.

Spouses essentially are able to treat the Roth IRA as if they were the original owner because they not only do not have to pay taxes on it, but they are not required to take distributions either.

Change is possible

As with any estate-planning technique, your plans may evolve over time. All IRAs give you the flexibility to begin taking penalty-free distributions as early as age 59½. In addition, you can change the beneficiary at any time should your beneficiary’s needs change.

If your ultimate goal is preserving wealth for future generations, a stretch IRA strategy will generally allow you to grow your assets for a longer period of time and allow them to continue to grow after you pass.