When it comes to retirement planning, many investors focus on how much they’ve saved. But just as important is how you take money out. The order and mix of withdrawals from your accounts can make a six-figure difference over a retirement.
Let’s look at a simple example. Imagine two retirees, each with the same nest egg:
- $500,000 in a traditional IRA (tax-deferred)
- $250,000 in a Roth IRA (tax-free)
- $250,000 in a taxable brokerage account
Each wants to withdraw $60,000 per year to cover living expenses.
- Scenario 1: The “Pro-Rata” Approach. They pull proportionally from each account every year—half from the IRA, a quarter from the Roth, a quarter from the brokerage. On paper, this seems balanced. But by consistently drawing from the IRA, they push more of their income into higher tax brackets, accelerate Required Minimum Distributions, and reduce the long-term growth potential of the Roth. Over a 25-year retirement, they end up paying about $120,000 more in taxes than necessary.
- Scenario 2: The “Tax-Smart” Approach. Early in retirement, they prioritize taxable withdrawals (where capital gains rates can be lower) while letting the Roth continue to grow untouched. They draw from the IRA just enough to “fill up” lower tax brackets without spilling into higher ones. Later, they use Roth funds strategically to manage income spikes and Medicare premiums. The result? They keep more of their wealth compounding and spend that $120,000 on themselves, not the IRS.
The lesson is clear: it’s not just how much you’ve saved, but how you spend it. A tax-optimized withdrawal strategy can stretch your retirement savings years longer than a one-size-fits-all approach.
At Hanover Advisors, we help clients build the right withdrawal plan—one designed not just to fund retirement, but to minimize lifetime taxes and maximize peace of mind.