Don’t Overlook the Importance of Tax Efficiency

Tax efficiency is another important key to assuring you don’t outlive your money.

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People often overlook the importance of tax efficiency when planning their retirement. The primary focus is on saving enough money and maximizing investment performance. These issues are important but don’t discount the impact tax efficiency can have on how long your money can last. A person retiring with 100% of their savings in a tax-deferred account like a traditional IRA or 401(k) will need to have a third more in savings to have the same spendable income as someone with 100% saved after-tax. Another retiree with 100% saved in a Roth IRA can get by with even less.

The New Three-Legged Stool™ strategy explains the importance of diversifying where money is saved for retirement. A recently released whitepaper examined the impact of tax efficient distributions on the sustainability of withdrawals. The study looked at a retiree with savings in a taxable account, Roth IRA, and tax-deferred 401(k). Was there a sequence of withdrawing funds from all three sources that would extend the life of the funds by minimizing taxes? The study found the most tax efficient sequence could extend the portfolio by seven and a half years longer than the least tax efficient sequence.

The conclusions reached in this study should open your eyes to the significance of tax efficiency. However, this is only the start. Studies like this assume some constants when comparing results. They don’t take into consideration opportunistic tax planning. Bear markets like the one we had in 2008-2009 offer the opportunity to reposition assets in the three legs through Roth conversions or harvesting losses in the taxable account. Taking advantage of these opportunities could extend the life of a portfolio even longer. Tax planning should be a long term strategy that takes into consideration the timing of Social Security benefits and pensions. Tax efficiency is another important key to assuring you don’t outlive your money.


Will Your Money Last Through Retirement?

No one wants to run out of money. But without goals and a solid plan,
how can you know for sure whether you’re on the right track?

Will I be able to maintain my current lifestyle?

What will my monthly income be in retirement?

Can I protect my hard-earned savings and still
have the income I want?

Rodgers & Associates answers questions like these every day.

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2025 Lititz Pike, Lancaster, PA 17601
Phone: 717-560-3800, Toll-Free: 888-876-3437