You’ve Saved; You’ve Accumulated – but How Do You Drawdown Wisely? Welcome to Your Income Optimization Stage
Whether you are nearing retirement or have already retired how you access your savings and utilize your investments is far more involved than simply pulling cash out. You need to make long-range and informed decisions to ensure you have ample cash to continue your chosen lifestyle, meet commitments, and avoid unnecessary taxes. This is where the practice of Income Optimization comes in. Income Optimization can be considered a part of Wealth Management but one that is strategized using very specific tools and data to produce a customized Drawdown Plan for each client’s particular needs and intents.
During our Early Working Years, the financial challenge we face is how to manage consumption vs. saving for the future. Our Accumulation Years are relatively straightforward as you need to save enough to meet your goals, invest wisely, and avoid the costly and common emotional mistakes.
However, once you shift from Accumulation to the Drawdown phase, the complexity increases. To further complicate matters, simple conventional wisdom is often not the optimal solution. In fact, sometimes the exact opposite of conventional wisdom is the best solution. As with all aspects of customized financial planning, every client’s unique needs and solutions vary depending on the facts.
Conventional drawdown wisdom is to withdraw from your nest egg in the following order: Taxable income and assets, Qualified assets, and Roth assets. It needs to be noted that as complexity increases, so do the optimal solutions. Included in our drawdown analysis are such variables as the tax rate, spending by year, Medicare cost thresholds, current account balances by account type, and other qualifiers as well as your Social Security analysis as this is a valuable stream of inflation-adjusted income.
Income Optimization During Your Drawdown Years
The financial planning process is broken into multiple phases (facts, goals, models). So too, is the Income Optimization phase. First, we need to update facts and goals and to decide on the most advantageous Social Security strategy. Only then should we begin the Income Optimization analysis. Roth IRA conversions can play a large role in this -especially given the TCJA (Tax Cuts and Jobs Act) of 2017 which expires in 2025. Roth IRA conversions are more than tempting right now due to the pending tax increase – but that is assuming there are no major changes in your life … or in the IRS rulings.
At Hamilton Financial Planning we leverage a modeling tool to help manage complexity. Once we have the facts confirmed, and your Social Security solution defined, we then can begin sifting through many options including lowest cumulative taxes, maximum ending balance, or any combination of the above.
We will typically have around 40 different strategies from which we select the top 5 to review in detail. Once we have decided on the optimal solution for your exact needs, your plan needs to be reviewed and reevaluated annually to ensure your plan, goals, and drawdown plan are still optimally beneficial given all the current facts. Thus, the ideal client engagement is an ongoing Wealth Management client.
At Hamilton Financial Planning we are firm believers that everyone should have a financial plan that includes ongoing professional asset management. Your personalized financial plan must also address how and when assets are to be withdrawn. As mentioned, this analysis is more complicated than accumulation planning.
If you are interested in learning how to Optimize Your Income during your retirement years, please click below to schedule some time to discuss this with Scott.
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Scott Hamilton is the founder and chief financial officer at Hamilton Financial Planning, a wealth management firm that specializes in providing comprehensive financial planning for retirees in Dallas, Houston, and Austin, Texas. With over 20 years of experience in the financial industry, and has completed over 250 financial plans for retirees across all industries, but mostly the oil and gas industry, Scott is passionate about providing his clients with the tools and insight they need to achieve their financial goals.
He has a Bachelor of Business Administration in finance from Texas State University and an MBA in international finance from Pepperdine University. Scott has also been happily married to his wife, Gayle, for over 25 years. To learn more about Scott, connect with him on LinkedIn.