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MY WIFE AND I CONTINUE to modify our retirement plan in response to changes in our lives. Most of the changes have to do with the timing of both our retirements. But there’s also the puzzling question of which investment accounts we should draw on for income. More on that later.
First, a bit of background: I started receiving my pension at the end of 2017, after I stopped working fulltime. We expected to start drawing on our retirement savings in 2018. But an unexpected career opportunity for my wife, plus some attractive consulting gigs for me, made that unnecessary.
I just turned 64. My wife is six months younger. She originally thought she’d work through the end of 2021, but she stopped at the end of June. This required us to switch from her insurance to mine for medical benefits.
During the pandemic, I’ve had limited opportunity for additional consulting work. That could change next year or even in the fourth quarter. But I’m not counting on a lot of income. Anything I earn, I’ll consider “found” money.
With work winding down, it’s time to execute our retirement plan—including starting portfolio withdrawals in 2022. Here’s our general framework:
Like many people, we have multiple financial accounts. We have joint checking, savings and taxable investment accounts. We each have rollover IRAs and Roth IRAs, plus I have a solo 401(k). We invest primarily in low-cost index funds.
This raises a question I hadn’t thought about previously. When spouses each have individual retirement assets, whose traditional IRA should we draw from first? Until we reach age 72, there’s no requirement to withdraw any amount from these accounts.
Should we draw from whoever’s account is currently largest? Should we draw from the person with the shortest life expectancy? I did some research, but couldn’t find consistent guidance on how to treat multiple accounts owned by a couple, so I’m still pondering the question.
I’ve never tried to have each of our accounts mirror the others in portfolio composition. Instead, I’ve looked at the whole of our accounts to make sure they match our overall asset allocation target.
For example, my wife’s IRA is primarily invested in U.S. stocks. My account is a bit larger, so I’ve used that account to diversify across U.S. shares, foreign stocks, cash and bonds. I use my account to rebalance our overall portfolio as thing change. This has worked well for us so far. I plan to keep this structure, taking annual withdrawals from my account and allowing hers to grow.
But is that the right strategy? I’d be interested to learn how others have approached this question. Any advice?
Richard Connor is a semi-retired aerospace engineer with a keen interest in finance. He enjoys a wide variety of other interests, including chasing grandkids, space, sports, travel, winemaking and reading. Follow Rick on Twitter @RConnor609 and check out his earlier articles.
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Lots to concur with here on your planning approach. 2 thoughts.
On the cash side, any reason you choose Vanguard vs a savings account with 0.5% interest?
On the question of which retirement fund to use first, one of my considerations is to reduce possible tax complexity for my wife in later years so I’m tapping my own more complex retirement funds first.
Thank you for posting this. My hubby is in aerospace, as was I until we had out kids, who are now adults. He wants to retire at round the end of 2022 at age 60. I am six months younger than he. He will have a pension and an option for retiree health insurance. I am currently working part time as a teaching assistant and seeking to boost my hours next year to get health insurance once he retires. If that works, my work based health insurance should be about $600/mo less than retiree coverage.
He will get a pension and we will need to decide what percentage spousal benefit if he predeceases me. Obviously, a higher beneficiary amount lowers his initial pension payment. If you don’t mind my asking, how did you arrive at 75%?
I will also get a very small pension when I retire, since I mostly worked part time. I do our finances and assumed that we would draw from his taxable accounts first. His 401K and IRA balances are 83% of our total retirement investments. We are both heavily weighted in stocks for our age. But the pensions provide a floor of income so I believe we can be a bit more aggressive to hedge against longevity. He has more international stocks than I do. I’m working on building as much unrestricted cash as I can to buffer us through downturns, but we are not anywhere near three years of expenses.
We are discussing when he should draw Social Security. The emotional side of him wants to start at 62 even though his father is alive at 94 and his mother at 87. They estimate they will have two years of savings left. His SS payment will affect mine, since my benefit is expected to be slightly higher than based on my own earnings history if I claim half of his.
We also own rental property, which is tough to integrate into a comprehensive financial plan with the tools I can find. This helps me feel good about our net worth even though we don’t yet agree on how to use these assets in retirement.
This whole “how much out of which account and when?” question is quite vexing. I appreciate writers such as you to help others like me sort out what’s what and maybe come up with a intelligent plan.
Good question, one I face now, but I have not found any answers.
Our situation differs in that my spouse has an IRA about the size of our planned 2022 withdrawal. That will probably be our withdrawal next year only because it will eliminate an account and not create a tax issue.
Thank you for sharing your thought process, Richard. I think it helps everyone to see that there are several approaches you could take, but only with hindsight could your financial plan be done perfectly. That’s where I am. I do often stop and think that I’m lucky to have this kind of challenge and not one of just scrapping by.
I have the same question, so I read your article.
Assuming your 401k has higher fees, I would want to get rid of those first.
Assuming I didn’t want to burden my heirs with taxes, I want to then go to the IRAs (unless I just converted my 401k to an IRA when I retired, as I should, again to lower fees.) The IRAs are probably all no fee, a wonderful thing, but
I ideally want to take from the owner with the lowest life expectancy assuming I and my wife truly share all things.
And as you mention, I want to watch the tax cliffs. Deferred taxes are not lower taxes, they’re just bigger taxes because I get no capital gains advantage and my money keeps growing, even if my tax rate doesn’t.
Roth conversions are a great way to pay the taxes while keeping the after tax money tax-protected until death. Of course, I want to be sure to keep my beneficiary designations up to date on each account.
Charitable contributions are a great way to deplete IRAs, but they’re also a great way to lower tax on ordinary income if my giving is substantial.
Hi Richard, interesting article.
My wife is five years younger than me. With our tax protected accounts, we plan to withdraw from my traditional accounts before hers, and probably my Roth accounts before hers, though it matters less since they have no RMDs.
If I were only six months older, there wouldn’t be much reason to go to my account first, but probably still would absent a reason to do otherwise. The ability to do away with a small account early might be a reason to favor that account first.
While managing a total portfolio and not individual accounts, the above does lead to a few differences; e.g., hers have no bonds.
Before going to these sources, we’ll draw from our taxable accounts, primarily by realizing capital gains at low rates as I’ve written about previously.
Good questions Richard, I wish I had more of a clue.
I’ve read to start with taxable accounts first, then go to traditional, then to Roth. This has the potential for significant benefits, though I don’t really understand how that works, and it doesn’t directly pertain to your question.
A second consideration is to pull from one’s accounts to avoid tax cliffs and fill up lower tax brackets, i.e. avoid higher marginal rates where possible.
A third consideration is that IRAs and 401Ks typically have access to different funds/etfs. That balance seems likely to impact our eventual strategy too.
Whatever I think my plan ends up being, I expect I will utilize a financial planner to help bullet-proof this decision.