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Thayer Partners Blog

How Conventional Wisdom Can Cost You Money in Retirement

[fa icon="calendar"] Dec 7, 2016 9:00:00 AM / by Chris Wilmerding

Chris Wilmerding

How-Conventional-Wisdom-Can-Cost-You-Money-in-Retirement.jpgPeople follow conventional wisdom in many aspects of their lives, and often, it works out well. When it comes to retirement, however, you shouldn’t just blindly follow rules because others say that you should or because that’s what you’ve always believed. Just because everyone thinks something is true doesn’t mean that it is. Think about it: millions of people once believed that planet Earth was flat, and that certainly isn’t the truth. 

Sometimes, conventional wisdom is flat-out wrong. In fact, conventional wisdom can actually end up costing you a lot of money when you are planning for retirement. Here’s how.

The Conventional Wisdom for Withdrawing Money in Retirement

You know that you should use strategic withdrawal strategies once you retire. Conventional wisdom would tell you to follow this typical withdrawal order:

First, take out money from taxable accounts because these savings are already subject to taxes and may end up qualifying for preferential capital gain treatment.

Then, you should withdraw savings from your tax-deferred accounts, including your traditional IRAs, 401ks, and 403s, in order to delay paying taxes on the withdrawals and to benefit from tax-deferred growth.

Finally, you should withdraw savings from your ROTH IRAs last in order to allow your money to grow for longer, unhindered by taxes.

Though this advice makes sense, it may not be the best strategy for you to use…

The 4% Rule

The 4% rule is another rule of thumb that many retirees blindly follow. It states that you should only withdraw 4% of your savings every year once you retire. While this rule can be a good starting point and one we have written a great deal about, it’s important to remember that it is simply a general rule, and one that shouldn’t be followed to the letter. Your circumstances may dictate that you can spend more, or have to spend less than 4% in order to have enough income to make it through all of your retirement years. When returns are flat or down, you may have to withdraw less for nonessential items, for example. Thus, the 4% rule may not apply to you.

No Two Retirees Are Alike

Though these withdrawal strategies could, in theory, work for many Americans, it’s important to remember that your goals, your savings, and your unique circumstances are unlike anyone else’s. This means that what works for others might not be the best strategiesfor you to use. You could actually end up paying more in taxes if you use conventional wisdom when that wisdom doesn’t work in your particular situation.

New Trend in Retirement Planning: Income Strategy Software

To ensure that you’re able to keep the most of your savings and that you’re giving as little away as possible to the IRS in income taxes, you should stop following conventional wisdom, and instead, use technology to your advantage. Today, income strategy software is being used to optimize the tax efficiency from various retirement buckets.

Using this type of software to determine your withdrawal strategies can effectively decrease your taxes by $50,000 to $100,000 or more! This can stretch your nest egg by two or three years, which comes out to saving approximately 10% of your money. This can have a large and positive impact considering retirees are living longer than ever before and Americans should now plan for 26 years or more of income in retirement.

Engage a Financial Advisor                  

Retirement planning can no doubt be complex and confusing. You could end up making mistakes that ruin your retirement or errors that end up costing you significantly in income taxes. 

Don’t let conventional wisdom be your downfall. Engage a financial advisor to help you find the more cost-effective withdrawal strategies that will allow for maximum savings and ensure that you don’t run out of money later in life. It could mean the difference between living your desired lifestyle and struggling to pay for expenses down the line.

How Much Do I Need to Retire?

Topics: Retirement

Chris Wilmerding

Written by Chris Wilmerding

Chris Wilmerding is Principal of Thayer Partners, an independent investment management firm located in Westwood, MA providing financial planning and wealth management counsel to individuals and their families.

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