Withdrawing from the Wrong Accounts in Retirement Could Cost You This Much…

September 29, 2022

Asking an Advisor:

Troy Sharpe: I had a prospective client recently say, “Troy, why should I hire you guys? I’m going to pay you this, it’s going to cost me this much over X amount of years. Why shouldn’t I just do this myself?” What I’m going to show you right now is one of the biggest value ads that a good financial advisor can provide to you in your retirement.

Troy Sharpe: Hi. I’m Troy Sharpe, CEO of Oak Harvest Financial Group, certified financial planner professional, host of The Retirement Income Show, and a certified tax specialist. Now, what that gentleman was actually asking is, and it’s a legitimate question, he’s like, “Hey, what type of value are you bringing to the table?”.

I’ve heard this question in a different format hundreds and hundreds of times from prospective clients coming to see us when they talk about their other advisor or the one they’re thinking about leaving and coming to work with us. It goes something like this, and they’re very similar as far as the ultimate answer that the client is looking for.

For years, I’ve heard this, and it’s Troy– the client will come in and say, “Troy, I went to my advisor and I asked my advisor which account should I take my income from, and they tell me, hey, it doesn’t matter. Just take 4%.”

They’ll go back and they say, “Well, should I take it from the IRA? Should I take it from the non-IRA?” Well, in this industry, for decades, the general rule of thumb has been to let the IRAs defer as long as possible and take from your non-IRA accounts. When they go to the financial advisor to ask them, they don’t do tax planning, so what they’ll say is, if you want tax planning, go talk to your CPA.

Focused mature customer reading agreement and consulting agent about details, pointing pen at paper

Now, as investment advisors, as fiduciaries, we are not allowed to give tax advice, but I don’t think you’re doing your clients or putting your client’s best interests first unless you provide tax planning. This is why step two and step three of our retirement success process is income planning and tax planning because these things matter. If done appropriately and correctly and according to your goals and in your best interest, they can result in hundreds of thousands, if not millions of dollars, in added value over the course of a financial advisor and client relationship.

Withdrawing:

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I don’t know if you’ve ever done this. If you’ve ever asked your advisor, I encourage you to do this if you have one, especially one of the big firms, the big banks, the big brokerage firms. Say, “Hey, thinking about retiring, from which account should I withdraw my income from? Should I take it from the IRA? Should I take it from the non-IRAs?”

One thing I can tell you is everyone’s situation is absolutely unique and the correct combination of withdrawals and from which accounts, for most people, is typically a lot different. What I want to say to sum this up here is from which accounts you take your income from in retirement has a massive, massive impact on so many other aspects of retirement. If you take it from the IRA, that impacts how much you pay in tax. It impacts your account balances, it impacts how much your RMDs will be down the road. It could trigger other taxation items within the tax code.

If you take it from the non-IRA, it could impact taxes depending on capital gains. It could reduce your dividend income. It will increase your IRA balances because you’ve left that money in there, theoretically, to grow. It can change when you take social security. It can change so many different things. Please understand, and I’m going to show you here, in just a minute, how big of an impact this can be, but I want you to take away from this video that do not settle for “it doesn’t matter”.

A layer of money with clock in the center. finance idea

If you ask your advisor or you ask someone from which account should I take from in retirement, or if they tell you just blanketly to let the IRAs defer, I would probably start looking for another advisor because either that person is uneducated, ignorant, or simply lazy. I don’t want to be rude, but that is the truth.

When we look at one simple example here. If someone wants to retire at 65, 1.5 million of total retirement savings, is split 50/50 between a taxable account, what we call non-qualified, and then a tax-deferred account. The desired spendable income right here is about $80,000 pre-tax on top of social security. We want the money to last for 30 years, and the objective is to sustain retirement income that maximizes the sustainability of retirement income.

Now, what we see here on this chart right behind me are four different scenarios. The only thing different in these four scenarios is the accounts from which the withdrawals are taken. We see over here on the Y-axis, we’re starting with about $1.5 million, but we have to take that $80,000 out to spend the first year of retirement, and we have four different outcomes.

The blue line is taking all of those withdrawals from the IRA first. In this particular situation, that would be the wrong thing to do. The second one that we see is spending the brokerage account first. Now, much better here than spending the IRA first, but still it’s a third fiddle. The top two strategies are what, from my experience, the majority of people are going to benefit the most from.

The art or the skill– it’s a combination of skill and art, honestly, is identifying the correct percentage to take from each account the correct dollar amount, as well as, when we look at the best strategy using partial Roth conversions, identifying the appropriate amount to convert while also staying within the targeted tax bracket and having the income that we need to live our lives in retirement.

Gray Line:

The gray line, which is number two in this hypothetical scenario, is the split withdrawal strategy. That’s instead of taking it all from the non-IRA first and letting the IRA defer or vice versa, we’re taking some money out of the IRA, we’re taking some money from the non-IRA, and we’re targeting specific brackets. The top strategy here, the gold line, is using partial Roth conversions, where we’re targeting Roth conversions, a specific tax bracket, and we’re getting income from the non-IRA accounts.

When we look at– if we do this analysis for you in your situation, the lines may be different, but the key is really identifying what is the appropriate amount to consider for the Roth conversion, and maybe it’s a split withdrawal strategy, it’s not the Roth conversion for you, identifying how much is the correct amount to take out of the IRA and also the non-IRA accounts.

Rpa concept with blurry hand touching screen

We look here, again, this hypothetical example, the ending account balance with all the variables that we looked at on the previous page, the partial Roth conversion strategy, we pass away with an estimated $1.4 million versus the worst strategy, a little under, let’s call it about 175,000, so well over a million dollars in difference. The only thing that changed is the distribution strategy. Considers the same rate of return, the same income coming out. The only difference is from which accounts we take that. A good example of how taking income from the wrong accounts could cost you, in this example, well over a million bucks potentially.

Now, one thing I’m absolutely certain of, having done this with thousands of people over the course of my career, is this stuff matters. It matters significantly. If you have a financial advisor and you’re paying a 1% management fee, my opinion, you should be getting a lot more than just investment management.

We should be getting this type of planning:

All of this is what retirement is about, and all of these things stacked together combined with making good decisions year after year after year is how a good advisor really adds value to that relationship.

If you’d like to have a conversation with someone who does this, feel free to reach out to us. If you have a good advisor already, congratulations. If you’re not certain if your advisor does this stuff, just simply ask them, “Hey, from which accounts should I withdraw from?” If they tell you it doesn’t matter or we got this, or just defer the retirement accounts, I would start looking for a different advisor.

Thanks for watching. Of course, make sure to subscribe to the channel so we can keep you more connected to your money, and help you make better decisions when it comes to retirement. Comment down below and then share this video with a friend or family member if you think they could benefit from the content today.