How to Strategically Draw Down Retirement Savings at Age 72: A Guide from a Hawaii Financial Planner

As you enter this new phase of retirement, managing withdrawals from your savings effectively becomes critical, particularly when Required Minimum Distributions (RMDs) come into play. For many retirees, assets may include Traditional IRAs, Roth IRAs, taxable brokerage accounts, and potentially annuities. Each of these accounts has distinct tax implications, and the sequence in which you draw from them can have a significant impact on your retirement income—helping ensure your hard-earned savings last.

In this guide, a fee-only financial planner in Hawaii provides a strategic, tax-efficient approach to drawing down your retirement accounts. By following these steps, you can minimize taxes, maintain flexibility, and avoid the risk of depleting your savings prematurely.

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Step 1: Establish Your Retirement Income Needs

The initial step is to clarify how much income you will require to meet your expenses after accounting for Social Security benefits, pensions, or other fixed income sources. For example, if your annual income target is $90,000 and you receive $60,000 in Social Security benefits, you will need an additional $30,000 from your retirement savings.

Because withdrawals from Traditional IRAs and 401(k)s are taxed as ordinary income, you’ll need to consider taxes in your planning, likely targeting a pre-tax amount of around $40,000–$45,000. With this in mind, let’s examine how a Hawaii advisor might approach the most tax-efficient withdrawal sequence.

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Step 2: Start with Required Minimum Distributions (RMDs)

Once you reach age 72, the IRS mandates that you begin RMDs from Traditional IRAs and 401(k)s. These withdrawals are calculated based on your account balance and life expectancy, generally starting at about 3.9% of your balance and increasing annually. For example, a $1 million Traditional IRA would require an initial withdrawal of around $39,000. Since RMDs are treated as taxable income, they often serve as your primary source of retirement income.

It’s crucial to satisfy your RMD obligation annually to avoid a steep IRS penalty of 50% on any undistributed amount. Even if you don’t need all of this income, consider reinvesting it in a brokerage account or using it to meet other financial goals.

Example:
If your RMD is $39,000, but after taxes, it only nets $32,000, this amount can cover much of your income needs. If there’s a shortfall, your brokerage account can be a tax-efficient next step.

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Step 3: Supplement with Withdrawals from Your Brokerage Account

After meeting RMD requirements, consider withdrawals from your taxable brokerage account. Withdrawals here are typically more tax-efficient than from Traditional IRAs, as taxes are only incurred on dividends, interest, and capital gains when investments are sold. Long-term capital gains are taxed at lower rates than ordinary income, generally 0%, 15%, or 20%, depending on your taxable income.

This flexibility makes brokerage accounts an ideal secondary source of income after RMDs. By focusing on low-gain assets or investments with long-term capital gains, you can avoid pushing yourself into a higher tax bracket unnecessarily.

Example:
If you need an additional $10,000 after RMDs to meet spending goals, withdrawing from your brokerage account could help you keep taxes low. Selling investments with minimal appreciation can further reduce your tax burden, helping to preserve more of your retirement savings.

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Step 4: Utilize Roth IRA Withdrawals Strategically

Roth IRAs offer a unique advantage in retirement: withdrawals are tax-free, and there are no RMDs. This means you can leave your Roth IRA funds untouched to continue growing tax-free as long as possible. However, Roth withdrawals can provide valuable flexibility in high-expense years or when you want to avoid additional taxable income.

Since Roth withdrawals don’t increase your taxable income, using this account strategically can help manage your tax obligations effectively. Additionally, Roth IRAs are valuable for legacy planning, as they remain tax-free for beneficiaries.

Example:
Imagine covering basic expenses with RMDs and brokerage withdrawals, but an unexpected medical expense arises. Rather than drawing additional taxable income, you could use funds from your Roth IRA, avoiding a rise in your taxable income.

Pro Tip on Roth IRAs: Consider Roth IRAs as a longer-term reserve for later retirement stages or for legacy planning.

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Step 5: Delay Activation of Your Deferred Income Annuity

If you have a deferred income annuity, it can serve as a reliable income source later in life, especially as a safeguard against longevity risk—the risk of outliving your assets. Since annuity income is taxable, activating it later, in your late 70s or early 80s, can help keep your taxable income lower in the earlier years of retirement.

Delaying annuity activation can be beneficial if you’re comfortably meeting expenses with RMDs and brokerage withdrawals. Later, the annuity can complement income from other sources, especially if your expenses increase.

Example:
If you’re covering expenses comfortably with RMDs and brokerage withdrawals, waiting until age 80 to activate the annuity may make sense. This way, the annuity can provide a predictable income stream if healthcare or other costs rise in later years.

Annuity Activation Strategy:

• Delay annuity activation until age 80 or beyond to reduce taxable income in early retirement.
• Use annuity payments as a stable income source as your needs evolve over time.

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Step 6: Manage Social Security Taxation Strategically

Social Security benefits become taxable once combined income exceeds specific thresholds. “Combined income” includes half of your Social Security benefit plus other taxable income, such as RMDs and investment income. Up to 85% of Social Security benefits may be taxable if you exceed these limits, so managing taxable income is essential.

By strategically using brokerage or Roth IRA withdrawals, you can maintain a lower combined income, reducing taxes on Social Security benefits.

Tips for Managing Social Security Taxation:

• Draw from brokerage or Roth IRA accounts as needed to keep taxable income within lower limits.
• Coordinate withdrawals across accounts to avoid income “spikes” that increase Social Security taxation.

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Step 7: Plan for Inflation with Growth Investments

Over the course of a lengthy retirement, inflation can erode purchasing power. Consider keeping a portion of your brokerage account or Roth IRA in growth assets, such as stocks, which have historically provided returns exceeding inflation. This approach helps ensure your savings can support your lifestyle through rising costs.

Balancing growth-oriented assets with stable income-producing assets, such as annuities, lets you address both current spending and long-term inflation.

Example:
Consider allocating a portion of your brokerage account to growth-oriented investments like stocks or index funds. These assets can offer long-term growth to help your savings keep pace with inflation.

Inflation Protection Tips:

• Retain a growth component in your brokerage or Roth IRA for inflation protection.
• Supplement your annuity’s steady income with growth assets in other accounts for a balanced approach.

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A Yearly Withdrawal Strategy for Tax Efficiency

To simplify your retirement income plan, here’s an annual withdrawal order that maximizes tax efficiency:

1. Begin with RMDs from Traditional IRAs and 401(k)s: Required by the IRS, RMDs are taxable income.
2. Supplement with brokerage account withdrawals as needed: Choose low-gain assets or long-term capital gains.
3. Delay annuity income until age 80 or later: Provides steady income once other assets are lower.
4. Use Roth IRA withdrawals for high-expense years: Tax-free withdrawals help control taxable income.

This sequence will help you manage taxes effectively, minimize Social Security taxation, and sustain your assets throughout retirement.

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Staying Flexible and Working with a Fee-Only Financial Planner in Hawaii

Flexibility is essential in retirement planning, especially with shifting economic conditions and evolving personal needs. Regularly reviewing your withdrawal order, tax implications, and long-term goals can keep your strategy aligned with your retirement plans.

A fee-only financial planner in Hawaii can assist in adapting your strategy as tax laws or financial situations change. They can also guide you on options such as Roth conversions, portfolio adjustments, or other tax strategies to optimize retirement income and preserve assets. Working with a Hawaii advisor who understands your needs ensures your income strategy remains effective and resilient.

By adopting a proactive approach and consulting with a qualified advisor, you can enjoy a secure, tax-efficient retirement with peace of mind, knowing your financial decisions are well-aligned with your lifestyle goals.

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