Shakespeare Blog: View from the Lake

Group 512

By Brian Ellenbecker CFP®, EA®, CPWA®, CIMA®, CLTC®

Managing your incomes sources in retirement may seem like a simple task but can get complicated quickly when trying to minimize taxes and maximize growth—not only for you, but also your potential heirs.  Having a strategy for managing your various sources of income is critical to optimizing your wealth over time.

Let’s take a look at some of the most common retirement income sources and some of the key considerations:

Social Security

Social Security is an income source available to almost everyone.  It is important to know the Social Security rules because they impact almost everyone.  The most common question we get asked is “when should I file for benefits”?  For more information on that topic, see last month’s blog post titled When Should I Start Taking Social Security?

A person can file for benefits in any month between the ages of 62 and 70.  You must wait until Full Retirement Age to receive your standard Social Security benefit.  Your full retirement age depends on the year you were born.  If you take benefits before your FRA, you will receive less than the standard benefit amount.  If you delay benefits, your standard benefit amount grows by 8% per year until age 70.

If you are married, your spouse may be entitled to spousal and/or survivor benefits.

It is important to coordinate your Social Security filing strategy with other income sources and your portfolio withdrawal strategy.


Similar to Social Security, figuring out when to start your pension is a common question we get asked.  You also need to choose the appropriate payment option.  Different pension plans offer different payment options.  Most common options include single life annuity, joint and survivor annuity, term certain annuity, and lump sum payment options.  Lump sum payments can typically be rolled over to your IRA, deferring taxes even longer.  Work with your Shakespeare Advisor to better understand the pros and cons of each option.

Five years prior to retirement is a great time to request a pension benefit illustration.  The illustration will provide you with payment options and amounts.  Having the most up-to-date information is critical when starting to evaluate these important decisions.

Deferred Compensation

Under a deferred comp plan, you agree to set aside a portion of your annual income until a later date—typically upon retirement.  At that time, distributions are taxable as ordinary income.

Similar to pension plans, different payment options may be available.  The most common options are lump sum payments or monthly payments, which most commonly last between three to five years.  Unlike pension plans, lump sum distributions cannot be rolled over to an IRA.

Check with your employer as to when the payout election must be made.  Different plans will have different rules. You don’t want to miss the window and get stuck with a default election that doesn’t make sense for your situation.

Real Estate

If you have income producing investment property, there are a few key considerations to keep in mind:

  • Be honest about the income outlook for the property. If it is a property you’ve owned for a while and has a solid cash flow history, then it’s likely something you can count on.  If the property has a history of erratic income, tenant issues, or always has surprise repairs pop up, you may want to discount the amount of income the property will truly provide.
  • Do you plan to sell it? If so, be sure to convert the income to an asset at an appropriate point in your planning projections.  It’s important to try to be realistic about the amount that will be realized.  If liquidity from the property appears to be a requirement to make the plan work, be sure to formalize the strategy and potential triggers for when the property will need to be sold.  Setting those expectations on the front end avoids surprises down the road.
  • If there are plans to turn the property over to the kids or other family members at some point, work with a CPA and estate planning attorney to ensure you are getting the proper tax and legal advice to transition the property in the correct manner.

Building a Cohesive Portfolio Withdrawal Strategy

Building a cohesive portfolio withdrawal strategy requires you to account for all the factors in a person’s financial situation.  Folding it all together in a financial planning projection is the best way to start to develop the withdrawal strategy.  A financial plan will help you create a long-term, high level strategy.  It will model income from all available sources, such as Social Security and pensions.  Determining a safe withdrawal rate can help ensure that your portfolio will last long enough to provide income for your lifetime.  Take out too much, and you might run out of money in your later years. Take out too little, and you might not enjoy your retirement years as much as you could. Your withdrawal rate is especially important in the early years of your retirement. The structure of your portfolio and your withdrawal rate early on can have a significant impact on how long your savings will last.

Investment Portfolios

Your portfolio will likely provide the majority of your income when you retire.  How you access that income can have a big impact on how long your money lasts.  There are many strategies you can use to draw income from your portfolio.  You will need to decide which accounts to pull money from (taxable, tax-deferred, or tax-free) and when and how often you want to withdraw money (regularly or as needed)—all while managing your asset allocation.

The ultimate goal should be to choose a strategy that provides you with the income you need, while also keeping taxes and estate planning goals in mind.  Making withdrawals from the proper account type each year can minimize your tax liability both now and in the future.  We may also recommend longer–term tax minimization strategies, like harvesting capital losses, Roth IRA Conversions, and realizing capital gains at the 0% tax rate, to name a few.  Your financial plan includes tax projections which can help you make these determinations.

In addition to managing your income strategy, you will want to keep a close eye on your asset allocation.  Your mixture of stocks and bonds will not only determine your expected return over time, but how much volatility you will experience.  It’s important to keep your asset allocation on target as you take withdrawals to maintain the proper risk/reward balance.

Your Shakespeare Advisor can help you address all these questions and more to ensure you manage your income sources appropriately throughout retirement.