Which type of financial advisor should I consult to determine the optimal drawdown strategy to minimize taxes in retirement?
I'm retiring from the federal government in 2019 and my wife is retiring at the same time. Our savings are comprised of my thrift savings plan, her 403(b) and 401(k). We also have shared money outside our workplace savings in Roth retirement accounts, taxable investment accounts, and taxable mutual funds. Who should I consult to ensure my drawdown strategy is optimized to minimize taxes? I have been told to look into hiring a tax attorney, but have also been suggested to look into an investment advisor. Do some advisors specialize in drawdown versus the accumulation phase of retirement planning?
You should look into meeting with a fee-only financial advisor/planner. NAPFA is a great resource and directory for these types of professionals. You may also look for a CFP or certified financial planner.
Professionals with those affiliations or designations are held to the highest standards and work to eliminate as many conflicts of interest that may sway their advice. For example, your TSP account probably has very low-cost investment options, it may or may not make sense to roll the funds out of that account into an IRA in retirement. A non-fiduciary would be inclined to recommend you do so to get paid on assets/commissions even if it's not necessarily the best choice.
Most advisors will meet/chat with you for free initially so you can get a feel if it's a right fit. Best of luck and congrats on the coming retirement!
Most advisors are well versed in this financial challenge. I don't think you need a tax attorney.
Here's the general principle: Because money in tax-free retirement accounts is taxable when it is withdrawn, you should not withdraw any of it unless you absolutely must. If you can, don't withdraw any until after you turn 70-1/2 (or your wife turns 70-1/2 in the case of her 401/403 accounts). Instead, live on your taxable savings for as long as you can. A withdrawal from a taxable account is not taxed; the only tax you pay is on dividends, interest, and net gains.
As far as asset allocation is concerned, you should have the high-dividend/interest investments in the tax-free accounts, so you have less current investment income. You should then put your common stocks into the taxable accounts so when you need to withdraw you can choose investments that don't hit you with big taxable gainswhen you trim them. Your advisor should also know how to trade around your equity holdings in order to harvest tax losses (this can be done in such a way that you may take tax losses but not economic losses. I can explain further if you would like.)
I've been doing this for 28 years. It's really not that difficult. Best of luck.
Congratulations on your pending retirements!
Most people think about taxation in retirement rather and think about drawdowns as secondary. It actually is the reverse. Taxation is already baked into the cake based on where you focused your savings while working. TSP, 401k and 403b's all are deferred while working - and then taxed once you begin withdrawals from them. Roth conversions may play a part is spreading taxation over a number of years, however work best prior to reaching age 70 1/2 (each of you have separate Required Minimum Distributions (RMD) from each different type of retirement account).
Taxation is a function of your standard of living. If you need to withdraw dollars to support your living expenses, then those withdrawn dollars, added to your pension(s) and Social Security (are you CSRS or FERS? Social Security WEP and GPO are factors for CSRS retirees) move you through both Federal and State income tax brackets accordingly. Most retirees I work with come with retirement taxes similar to what they had working because their standard of living expenses are similar, with small differences based on their spending choices after retiring. Thus, the strategy isn't so much tax minimization, but looking at where you are in your tax brackets to strategize between how much you spend overall (to put you in each bracket) and possibly Roth conversions to the top of your current bracket (which reduces the balances post age 70 ½ which reduces the RMDs).
All this said about taxation, structuring your portfolio allocation overall to optimize the withdrawals for drawdown is actually more important. Asset efficiency, where the money works as hard as it can (not the same as getting the highest returns; but, an efficient return and volatility combination based on withdrawals maximization together) is important so that you don’t have to spend more dollars because assets aren’t deployed efficiently relative to your ages in retirement (allocation changes slowly as you age so this should be reviewed annually).
Now to your question about advisers. First, I suggest you search for a Fee- ONLY adviser near you (that also meets the below specifications) via https://www.napfa.org/ (National Association of Personal Financial Advisors – NAPFA). They are fiduciaries without bias by sales agendas). Second, search for an adviser who has 1) the better part of their practices constituting Federal retirees, and/or 2) have had Federal service themselves (example: I’m retired military which a lot of experience working with Federal civilians during that time – and currently work with Federal and State retirees). Finally, looking at who you’re considering closely online helps narrow your search. Here’s an example of many things to look for while evaluating your adviser choices you come across https://blog.betterfinancialeducation.com/business-structure/credentials-and-process/ (not a solicitation, but what I’ve put together in one place that answers what kind of adviser I am AS AN EXAMPLE for you).
Finally, yes there are advisers who specialize in drawdown. In fact that is my specialty based on working with retirees, but more importantly contributing to the body of knowledge on this relatively new topic via academic peer-reviewed published research https://www.betterfinancialeducation.com/larrys-contributions-retirement-research-body-knowledge (again as an example for you to guide what kind of questions you ask of those your considering hiring to work for you as your adviser).
As a closing thought, pension choice is very important for retirement planning because of the ramifications of lost income for the survivor (either of you). Social Security has an automatic pay cut for either survivor (lowest benefit automatically goes away regardless of who goes first; with potential implications if WEP and GPO apply). Retirement consists of three(3) phases: Phase 1, you’re both here (the phase most people ONLY thing about); Phase 2, either of you are here (survivor planning is critical during Phase 1 to avoid surprises here); Phase 3, neither of you are here (where Estate Planning is important. Drawdown strategies typically have unspent resources because the goal is to now outlive your money (assets) so keeping this phase current is important all along the way too).
I hope this helped focus your thoughts as you transition into retirements. Congrats again!
The simple answer is that you're looking for a fee only fiduciary. Most planners/ advisors have clients in both stages, but it would be a good question to ask incase that advisor doesn't specialize in that area.
I hope this is helpful!:)
It’s interesting to see your question as I’m currently doing a comprehensive financial plan for a couple who both work for a government agency, thus having the pension as well as the 401k. They shared similar concerns as you do: 1) Can they retire based on their savings? 2) How would the withdrawals affect their tax? Because my knowledge with the retirement income and taxation, I was able to recommend a strategy and tested out on the software. The result is nothing short of an amazement-- $1.5 million dollars tax savings over their 30-yr. retirement period, as well $18k Medicare premiums savings.
Upshot: In order to do it right, you need to work with a CFP who has extensive tax background. Just work with a tax attorney, he/she may not have the retirement income knowledge to help you with the withdrawals and investments growth. Best!