An orchestra is simply a collection of instruments, each producing its own unique sound. It is only when a conductor brings them together that they create the beautiful music envisioned by the composer.
The same can be said about your retirement strategy.
A well-designed retirement plan is often built on three primary savings vehicles: employer-sponsored retirement plans, IRAs, and taxable investment accounts. When these pieces work together, they can help support the retirement you’ve envisioned.¹
Hierarchy of Savings
Maximizing the effectiveness of your retirement strategy begins with understanding the hierarchy of retirement savings.
If you’re like most Americans, the amount you can save for retirement is limited. As a result, it may make sense to prioritize your savings by directing contributions to the accounts that offer the greatest potential benefits. For many investors, that means contributing to an employer-sponsored retirement plan first, followed by an IRA. Once those opportunities have been maximized, additional savings can be directed to taxable investment accounts.
Once you’ve determined where to save, the next step is deciding how to invest those assets. That’s where your Patriot advisor can help. We’ll review your financial plan, coordinate your investments across your various accounts, and help ensure your portfolio aligns with your retirement goals, risk tolerance, and tax considerations. Just as a conductor brings individual instruments together to create a symphony, a coordinated investment strategy can help your retirement accounts work together toward your long-term goals.
Withdrawal Strategy
When it’s time to begin living off your retirement savings, coordinating your withdrawals becomes just as important as coordinating your investments.
There is no one-size-fits-all approach. The right withdrawal strategy depends on your income needs, tax situation, and long-term financial goals.
Your retirement income strategy should also consider other sources of income, such as Social Security benefits and pension payments. These income sources can play an important role in determining how much you may need to withdraw from your investment accounts and when those withdrawals should occur. Coordinating these income streams with your overall financial plan can help create a more efficient and sustainable retirement strategy.
One approach may involve withdrawing from taxable accounts first, allowing tax-deferred retirement assets additional time to potentially grow.
If you have both Traditional and Roth IRA accounts, your expectations about future tax rates may influence your withdrawal strategy. For example, if you believe tax rates will be higher in the future, you may prefer to withdraw from Traditional IRA assets before tapping Roth IRA assets. If future tax rates are uncertain, another strategy is to withdraw enough from Traditional accounts each year to fill your current tax bracket, then use Roth assets for any additional income needs.⁴
Key Takeaways
Understanding the retirement savings hierarchy can help you make the most of your retirement dollars. Prioritizing contributions to employer-sponsored retirement plans, IRAs, and taxable investment accounts can help maximize long-term savings.
Coordinating investments across different account types may improve tax efficiency and help your portfolio better support your long-term financial goals.
Your withdrawal strategy can significantly impact your retirement income and taxes. The most effective approach should be tailored to your goals, income needs, and overall financial plan.
Ultimately, every investor’s situation is unique. Building an effective retirement strategy isn’t just about choosing the right investments—it’s about coordinating all aspects of your retirement plan, including how you save, invest, and withdraw your assets, along with other sources of retirement income such as Social Security and pensions. The best approach should reflect your personal goals, risk tolerance, investment time horizon, income needs, and tax circumstances.
If you have questions about your retirement strategy or would like to review your financial plan, contact your Patriot advisor. We’re here to help ensure all the pieces of your financial plan are working together to support your long-term goals.
- In most circumstances, you must begin taking required minimum distributions from your 401(k), Traditional IRA, or other defined contribution plan in the year you turn 73. Withdrawals from your 401(k), Traditional IRA or other defined contribution plans are taxed as ordinary income, and if taken before age 59½, may be subject to a 10% federal income tax penalty. 401(k) plans and IRAs have exceptions to avoid the 10% withdrawal penalty, including death and disability. Contributions to a traditional IRA may be fully or partially deductible, depending on your individual circumstances.
- Asset allocation is an approach to help manage investment risk. Asset allocation does not guarantee against investment loss.
- The market value of a bond will fluctuate with changes in interest rates. As rates rise, the value of existing bonds typically falls. If an investor sells a bond before maturity, it may be worth more or less than the initial purchase price. By holding a bond to maturity an investor will receive the interest payments due plus his or her original principal, barring default by the issuer. Investments seeking to achieve higher yields also involve a higher degree of risk. The return and principal value of stock prices will fluctuate as market conditions change. And shares, when sold, may be worth more or less than their original cost.
- Roth IRA contributions may be limited or unavailable for taxpayers whose income exceeds IRS limits. However, eligibility depends on factors such as filing status and modified adjusted gross income (MAGI). To qualify for the tax-free and penalty-free withdrawal of earnings, Roth IRA distributions must meet a five-year holding requirement and occur after age 59½. Tax-free and penalty-free withdrawal can also be taken under certain other circumstances, such as a result of the owner’s death. The original Roth IRA owner is not required to take minimum annual withdrawals.
This content is developed from sources believed to be providing accurate information, and provided by Twenty Over Ten. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.