Published in the March 15 – 28, 2017 issue of Morgan Hill Life

By Dan Newquist

Dan Newquist

As adults, we know the importance of saving for retirement. It’s really easy. Just set up an automatic withdrawal from each month’s paycheck and direct it into a retirement account. What becomes trickier is the amount we should be saving and how we should best invest it.

But what happens as we enter retirement? We’ve been saving money our entire lives. In theory, we know what’s needed — simply rely on savings, Social Security and, if we have one, a pension. Put another way, we are in a transition period that moves us away from retirement planning to retirement income planning.

Over the years, I’ve had many clients and colleagues reach out as they recognize that the seemingly simple concept of relying on savings really isn’t so simple. At this point, I could stuff this article with facts and information, overwhelming many of you. Instead, I want to provide a high-level overview of two key components of retirement income planning.

A couple of years ago a study by the American Institute of CPAs revealed that two prime retirement income planning concerns are: (1) running out of money; and (2) how to more efficiently and effectively tap into my retirement assets. “How much money do I have to live on each month?” is a common question. And, “Which accounts and in what amounts should I pull funds from?” comes up often.

Let’s start with the first question. Sources of income during retirement may include Social Security, assets, earnings from part-time work, earnings from an annuity, and a pension. Social Security, a pension, and the annuity are reasonably stable. For most folks, however, it’s not enough to live on, and a lifetime of savings plays a key role in filling the gap.

Some of you are in a position to live off interest and dividends, only withdrawing principal for special needs. Many, however, must rely on carefully meting out and using much of their lifetime savings.

One approach is to employ a “sustainable withdrawal rate.” One common method is the 4 percent rule. Simply stated: Withdraw 4 percent each year from your savings, an amount you may decide to keep constant or increase to keep pace with inflation. This was once a helpful rule of thumb, but low interest rates have made it less than ideal for today’s retirees.

We can always increase the annual withdrawal rate to 5 percent or more. However, if we raise it too high, there is the risk of running low or out of savings. Instead, consider a withdrawal rate based on your time horizon, asset allocation, and confidence level.

Questions to consider include:

1. How many years do you want to plan for?
2. What asset mix between stocks and bonds are you comfortable with?
3. What level of confidence do you want to have that your money will last?

A lower withdrawal rate will increase the odds the portfolio will last through your retirement years– that’s intuitive. But it also means less discretionary income. This dilemma also illustrates the need to keep an eye on capital appreciation, especially in today’s low-rate environment. Including an appropriate and diversified allocation of equities in your portfolio will help with asset appreciation.

Flexibility and ongoing monitoring are critical. Adjustments should be made based on your personal situation. So it’s important to monitor and modify as necessary.

Let’s move to the next question Which accounts should you tap first if your goal is to maximize spending during your lifetime?

1. Let’s start with the required minimum distribution from tax-deferred accounts such as IRAs. At 70 ½ years old, the IRS requires that you take a minimum distribution each year. Miss it and you’ll pay a big penalty.
2. Taxable interest, dividends, and capital gains distributions may be the next best source of income. If additional funds are needed, your anticipated future tax bracket comes into play.

If we expect a higher marginal tax bracket in the future, withdrawing from the traditional IRA today may be the most advantageous choice. But be careful the distribution doesn’t push you into a higher tax bracket in the year you take it.

If you anticipate a lower tax bracket down the road, a Roth IRA may be the best option for today’s income needs. If cash is still needed or desired, then look to a traditional IRA.
However, there is one big advantage to leaving the Roth alone. You continue to take advantage of the tax-free umbrella the Roth provides. Or you can hold on to the Roth for unexpected expenses.


These are just a couple of ideas to provide you with a framework as you enter or gear up for retirement. It is a broad overview that’s designed to shed light on a situation that’s unfamiliar to many retirees.

Each situation is unique, which means there are many other aspects of retirement income planning that could be useful for your specific situation.

Our door is always open. We’re always happy to answer any questions or provide a more comprehensive review tailored to your needs. And as always, when it comes to tax matters, consult with your tax advisor.

Dan Newquist, CFP®, AIF® is a Principal Investment Advisor Representative with RNP Advisory Services, Inc., a registered investment advisor, in Morgan Hill. He can be reached at (408) 779-0699 or Securities offered through Foothill Securities, Inc., member FINRA/SIPC, an unaffiliated company.