Part 2 – How to Optimize Your Spendable Income in Retirement

In Part 1, I mentioned that I was interviewed by Ed Tyll, on TalkRadioX.com and gave his audience a few simple ideas on how to maximize an investor’s after tax income in retirement.

One of these ideas is that wherever possible withdraw principal rather than interest. Withdrawal of principal is not taxed; interest is taxed at the highest rates. However, to accomplish that, there are two important conditions: avoid incurring any capital loss on the withdrawal of principal, and the interest earned has to be in a tax deferred account, such as a variable annuity. A no load variable annuity works best because of its lower fee structure.

I also mentioned that while certain income sources are potentially taxable, they can be offset by certain deductions, such as mortgage interest if you decide to continue carrying a mortgage into retirement.

You can use this idea as part of a broader strategy to create your own Plan for Retirement Income that takes into consideration all sources of income, and categorize these sources of income by tax attributes as follows:

  • Full Tax
    • Social Security (as much as 85% can be taxable – see note below)
    • Rollover IRA distributions
    • Wages and deferred compensation payments
    • Pension plan income payments and distributions from 401(k) plans
    • Interest on corporate and U.S. Treasury Bonds, and personal savings accounts
  • Reduced Tax
    • Variable and Fixed Payout Annuities ( portion of payments treated as return of principal are not taxable)
    • Dividends
    • Realized capital gains
  • No Tax
    • Roth IRAs
    • Municipal bonds
    • Withdrawal of principal

Note: Nothing about Social Security taxation is simple – essentially, depending on the adjusted base amount for your filing status for that tax year’s total income, up to 85% of your Social Security benefits for that that year would be included when determining the total taxes due.

The key to an efficient Plan for Retirement Income is how one assembles these elements, based on an individual’s personal circumstances. As a conservative investor, my own plan produces an after tax yield of over 5%, and still, with an opportunity for growth of both income and capital.

You can learn more about low cost tax deferred savings and the Plan for Retirement Income methodology at Savings2Income.com