As we celebrate the 4th of July, I want to explore a topic that doesn’t get nearly enough attention—how to withdraw money from different types of retirement accounts. Specifically, we’ll look at sequential vs. proportional withdrawals, and how your strategy can impact your taxes, your legacy, and your long-term retirement success.
We’ll walk through a hypothetical scenario to compare the outcomes, and the good news is—you can run this kind of analysis for yourself using the new Withdrawal Strategy Scenario in the Retirement Budget Calculator.
I
Articles, Links & Resources:
https://www.retirementbudgetcalculator.com/
Transcript:
457 How to Withdraw from Retirement Accounts the Smart Way
Announcer: Welcome back America to Sound Retirement Radio, where we bring you concepts, ideas, and strategies designed to help you achieve clarity, confidence, and freedom as you prepare for and transition through retirement. And now here is your host, Jason Parker.
Jason Parker: America, welcome back to another round of Sound Retirement Radio.
You are listening to episode number 457, how to Withdraw from Retirement Accounts the Smart Way. As we celebrate the 4th of July, I wanna explore a topic that doesn’t get nearly enough attention and it’s how to withdraw money from different types of retirement accounts. Specifically we’re gonna look at sequential versus proportional withdrawals and how your strategy can impact your taxes, your legacy.
And your long-term retirement success. We’re gonna walk through a hypothetical scenario to compare the outcomes and the good news is that you can run this kind of analysis for yourself using the new withdrawal strategy scenario that we built into the retirement budget calculator. But before we get started, I like to start out by renewing our mind, and I’ve got a verse here from Galatians chapter five verse one.
It is for freedom that Christ has set us free. Stand firm then, and do not let yourselves be burdened again by a yoke of slavery. And since we’re celebrating Independence Day, here’s something fun for the grandkids. Did you hear the one about the Liberty Bell? Yeah, it cracked me up too. What did one American flag say to the other?
I. Nothing. It just waved.
And just in case those don’t go over well at the, uh, barbecue with your friends and family, here are a couple of interesting facts you can share with them. As Americans, we’re expected to spend over $1 billion on fireworks just this year alone. That’s billion with a B, $1 billion, and we’re going to eat around 150 million hot dogs.
That’s enough to stretch from Washington DC to Los Angeles more than five times. And this one makes me feel a little bit nauseous, but Joey Chestnut holds the official hot dog eating contest record with 76 Hot Dogs and Buns. The Woman’s Record 51 set by Miki Pseudo in 2024. They had 10 minutes to eat as many as possible.
Alright, let’s get into today’s podcast. When you and your spouse are driving to your 4th of July party, here’s a question to consider. What does freedom mean to you? For many people heading into retirement, financial freedom means confidence, the ability to spend without fear, to give generously, to travel boldly, and to live with purpose.
Today we’re gonna talk about a specific kind of freedom, the freedom that comes from knowing how and when to tap into your retirement accounts, rather than talk about dynamic spending or guardrails or buckets or the barbell strategy. I wanna ask a simpler but fundamental question. How does the taxation of each account type impact your withdrawal strategy?
We’re gonna compare sequential versus proportional withdrawal approaches through a real world style example, and here’s the definition to make sure that we’re all on the same page regarding proportional and sequential. I. With a proportional withdrawal strategy, you withdraw money from each of your account types simultaneously in proportion to the total value of each account.
For example, if you have 40% in a taxable brokerage account, 40% in a traditional IRA and 20% in a Roth IRA. Then each year your withdrawals are 40, 40, 20. From those respective accounts. Now in the retirement budget calculator, the way that we created this is we have you withdraw proportionally from your taxable and tax deferred accounts first, and then we postpone taking the Roth or the tax free accounts till the very end.
The benefits of doing this is it may reduce your overall lifetime taxes by smoothing out income. It helps avoid big RMDs later by drawing down earlier from tax deferred accounts, and it preserves tax diversification longer into retirement. With a sequential withdrawal strategy, you follow a fixed order and it’s conventionally, typically you would do it where you withdraw first from your taxable or your non-qualified accounts.
Then from your tax deferred accounts, like your IRAs and 4 0 1 Ks, and then finally from your tax free accounts, so your Roth IRAs. A sequential method delays using tax advantaged accounts for as long as possible, and the benefits are that it defers taxes, allowing more compounding and tax advantaged accounts, maximizes tax free growth in Roth accounts, and it’s really simple and easy to understand.
The downside is that it may lead to larger RMDs and higher taxes later in retirement and can unintentionally push retirees into higher tax brackets in later years. Before we get into the numbers, here are a few things to consider. When will you claim social security? Will you take advantage of early retirement years for Roth conversions at low tax rates?
Will you draw down certain accounts early to keep taxable income low and health insurance subsidies high? Are you optimizing for lower lifetime taxes, higher inheritance, maximum social security income, or maximum spending while you’re alive? The reality is there’s no one size fits all. You have to know what your aiming for.
Because if you pick up a bow and arrow and you’re blindfolded, very rarely is that gonna lead to anything good, let alone hitting your target. Okay, so let’s get into our case study to explore this. I created a scenario in the retirement budget calculator, and you can follow along or run this for yourself.
John is 57 years old currently and, and Nancy’s currently 56, and they’re planning to retire on December 31st, 2028. Currently, they have really good income. John has $9,000 a month of wages, and Nancy has $7,000 a month, and we’re gonna assume that those wages are gonna continue to grow at 3% annually until retirement.
The other great thing about their plan is that they’re spending is less than their income. So right now they’re spending about $96,000 a year or $8,000 per month. And the way that that spending is broken down is important too. So in their case, they don’t have any debt. But they spend $5,000 a month on essential expenses.
Then they also budget $500 per month for discretionary spending cash for each of them. So there’s a total of a thousand dollars per month that is being spent on just discretionary spending. And then the other thing for John and Nancy is they love travel and they plan two big trips a year. They’re spending about $24,000 total, or $12,000 per trip.
They plan to continue to do this level of travel all the way out for the next 10 years, and then in 2036, they’re gonna cut down to only one big trip per year. They’re gonna spend half of that money, $12,000 per year, and they’re gonna do that for an additional 10 years out until, um, 2046. Now they don’t have any pension income or rental income.
The only guaranteed fixed income that they’re gonna have in retirement is social security. Their savings consists of $500,000 in a bank. In a cd. Then they have $500,000 in John’s 401k and $500,000 in Nancy’s Roth, IRA. And I always like to say, let’s hope for the best plan for the worst. And so we’re gonna assume that their money’s only growing at 4% per year.
I. Again for social security, they could wait until age 67 to start their social security, and each of them would have a benefit of $2,500 per month if they were to wait till 67. If they waited all the way till 70, they would have $3,117. Each per month because they get those 8% delayed retirement credits.
But in this example, we’re gonna assume that they start Social Security early at age 62, and they’re gonna each receive $1,750 a month from Social Security. Now, life expectancy is another important thing that we need to consider because we’re trying to figure out. You know if their money’s gonna last as long as they do.
And how do we optimize this? So if we look at the social security mortality tables for them, it says that John’s life expectancy is age 81, and Nancy’s is age 84. But in their case, we’re gonna say they’re not average. So we’re gonna assume that John’s life expectancy is 10 years beyond average. We’re gonna say he makes it to 91, and we’re gonna say Nancy makes it all the way to age 94.
And because they’re born after 1960, they won’t have to begin taking required minimum distributions from his 401k until age 75. So we’re baking all of that into this recipe as well. Okay, so the first strategy we’re gonna look at are sequential withdrawals. Once they retire, their social security income isn’t gonna be enough to cover their expenses.
Remember, they’re spending $8,000 a month in today’s dollars a ju and we’re gonna assume that those expenses are going up at 3% per year. So they’re gonna have to take withdrawals from their accounts and in, in a, in this sequential withdrawal order, we’re gonna assume that they’re taking from their non-qualified CD first.
Then second, after the CD is all gone, then we’re gonna dip into their, uh, tax deferred 401k account. And then we’re gonna save the Roth IRA to last. So here are the results. The ending balance at Nancy’s age 94 is $820,000. And all of that money is entirely in a Roth IRA. At that point, lifetime taxes paid are approximately $242,000.
Now, a quick note on taxes. What I assumed was that tax rates were gonna stay the same. But I do assume 2% inflation. So I’m assuming the standard deduction’s gonna increase by 2% per year, and that the marginal tax brackets are gonna increase at 2% per year. And then for social security, remember they started it early and we’re showing that in nominal dollars, they’re gonna have $2.5 million of total lifetime income from Social Security.
The cool thing about this is that the Roth IRA has been preserved for their heirs. So when they die. Their heirs are gonna receive this $820,000 and it’s all tax free. The heirs can leave it in the Roth IRA for another 10 years before they have to pull it out. And then in the 10th year, they would have to take it all out as a lump sum, but it gives ’em 10 more years of tax free growth.
So you figure, uh, that money could double again in, in 10 years once they inherited it. Okay. Strategy number two is to look at proportional withdrawals, and when we withdraw proportionally, what we’re gonna assume is that they withdraw equally out of the CD and the 401k until they’re both depleted. And then we’re gonna tap into the Roth IRA last if we use a proportional withdrawal strategy.
The ending balance at Nancy’s age 94 is $1,039,450. Lifetime taxes paid are $143,000, and the social security’s the same at $2.5 million over both of their life expectancies. So that’s over $219,000 and more assets, nearly $100,000 less in taxes. And all of that money is still in the Roth IRA, which benefits the beneficiaries at that point because, uh, they get to inherit a tax free pot of money.
Instead of a taxable pot of money. So in this example, proportional withdrawals produced better results, more wealth, lower taxes, in the same amount of social security in, in either scenario. Now, let me just say, this is not how your specific plan is gonna work out, and this is not a recommendation to do it this way.
The only way that you’re gonna know. The best strategy for you is to run your own numbers and to look at the trade-offs between things like social security and which accounts you’re gonna dip into you. You can’t use a hypothetical analysis like this and say, oh, this is the way I should do it, because nobody’s plan is gonna look like this one.
Your financial plan, your taxes, the amount of money that you have in your investment accounts, how you’re investing in those accounts. It’s almost like a fingerprint. It’s gonna be very unique and specific just to you. And that’s why we created the software. So I, you know, without software, this would be impossible to analyze.
And in the retirement budget calculator, we now include a withdrawal strategy scenario feature. So you can test a sequential withdrawal order. A proportional withdrawal order, a bucket strategy, or you can create a custom plan using a drag and drop feature. Now, if you love this kind of analysis, you can dig in by visiting the retirement budget calculator and signing up.
If not, that’s what my team at Parker Financial is here for. We can combine income planning, tax strategy, and investment management so that you can live your best retirement with confidence. There’s an old saying, an ounce of prevention is worth a pound of cure. Maybe in retirement. An ounce of planning is worth a pound of financial freedom.
Don’t go through life with a blindfold and a bow and arrow. Know what you’re aiming for, create a plan, implement it, and adjust along the way. And most importantly, it is for freedom that Christ has set us free and we hold these truths to be self-evident that all men are created equal. That they are endowed by their creator with certain unalienable rights.
That among these are life, liberty, and the pursuit of happiness.
Announcer: Thank you for tuning in to Sound Retirement Radio. For articles, links, and resources from today’s show, visit sound retirement planning.com. If you enjoy the podcast, share it with a friend and give us a five star review. Ready to kickstart your retirement planning head over to retirement budget.
At calculator.com. Need assistance with investment management, explore our services@parkerfinancial.net. Information and opinions expressed here are believed to be accurate and complete for general information only and should not be construed as specific tax, legal, or financial advice for any individual and does not constitute a solicitation for any securities or insurance products.
Please consult with your financial professional before taking action on anything discussed in this program. Parker Financial, its representatives or its affiliates have no liability for investment decisions or other actions taken or made by you based on the information provided in this program. All insurance related discussions are subject to the claims paying ability of the company.
Investing involves risk. Jason Parker is the president of Parker Financial LLC, an independent fee-based wealth management firm. Located at 9 2 3 0 Bayshore Drive Northwest Suite 2 0 1, Silverdale, Washington. For additional information, call 3 6 0 3 3 7 2 7 0 1 or visit us online@soundretirementplanning.com.
