When I studied for my Certified Financial Planner™ designation in the late 80's, it was broken into six sections: financial planning, insurance and risk, investments, taxes, retirement and estate planning. In your lifetime, you have come to learn the terms (and the struggles) of college planning, retirement planning and for those of you who have listened to me, estate planning.
Other than those of you who have met me in person or have been to my workshops, has anyone every spoken to you about withdrawal planning? Anyone? Hoo-boy…have we got work to do...
Let's start at the beginning. From the time you started working, if working for a company you contributed (hopefully) to your 401(k) or 403(b) regularly, raised your contribution when you got a raise- you did, didn't you- and worked diligently on sacrificing today to put away funds for that ultimate goal of retirement.
If you didn't work for a company or worked for one without a pension plan, you put away your Traditional IRA contribution annually for the same reason. For those of us in business, we started a Simple or SEP Retirement Plan for the self employed, and saved, saved, saved for that time in the future where we decided that we did enough for everybody else, and it was time to take charge of our life and retire.
Let's face it- isn't that what you saved all these years for? It seems that I see more and more people in our office who were good savers, but when I ask them the sacred question, "why did you sacrifice and save all these years" they tend to stare at me blankly.
To me, it's a simple question... to them, it's highly complex. Now, don't fret over the answer, for its easy: the answer, as I see it, is simple- "to have a retirement income stream when I decide to stop working that I will not outlive."
See? It wasn't a trick question, and you didn't even have to look in the back of the book for the answer!
The famous actor, John Houseman once did a commercial for Smith Barney in which he stated "it's not what you earn, but what you keep." It's a shame I am not telling you this in person, as I do a great John Housman impersonation- but if you remember it or knew of the actor, you knew the commercial.
While the gentleman is gone for decades, the statement is very much alive today. The way you save for retirement will dictate how much you keep after taxes when you begin to withdraw your retirement money.
Since most retirement money is in the form of retirement plans, it is before tax money which means that when you withdraw it, it is fully taxable as ordinary income. Therefore, depending on your tax bracket, you can lose a significant amount of that which you keep after Uncle Sam is done with you. The alternative? Withdrawal planning- the most overlooked part of retirement planning.
Financial planning regulations forbid me to give advice to the masses, so I'll skate by with an example known by many, but used by far less. You can contribute to a Traditional IRA, utilize the tax deduction in the year of contribution, and allow the funds to grow tax deferred. When you make withdrawals after age 59½, you will pay taxes as ordinary income in your tax bracket at the time. Conversely, you can make a contribution to a Roth IRA, pay the taxes in the year of contribution, the amount of contribution will grow tax deferred as well, but the withdrawals are non-taxable.
Therefore, at the time of withdrawal, you would have more in your pocket as the withdrawals are not taxable- you get to keep every penny you take out. This is but one example- there are many methods of withdrawal that can be utilized while saving for retirement and all should be considered when you are saving for retirement.
Maxed out your 401(k) contribution but would like to put more away? There's a way to do that too- your job is to make the money... my job is help you figure out what to do with it, and to attain your goals.
Ask your planner or give me a call and let's see how you can see more out of your retirement checks- remember, it's not just about retirement planning, but about withdrawal planning as well!