Corbin Ellard ChFC®, CPFA® and CRPC™ is a Senior Financial Advisor with Merrill Lynch in Birmingham. He is a partner of THE HARTY CARPENTER GROUP. Ellard is regarded as a Retirement Benefits Consultant.
CCL: How much should a retiree spend per year?
CE: Before deciding how much to spend each year, retirees should consider variables such as the age at which you retire, how your income needs will change and what your priorities are.
Your withdrawal rate is in some ways a reflection of your confidence that your investments will continue to grow. If you are comfortable investing more aggressively, you might decide to take a little more income each year. If you prefer less risk, you might opt for a lower withdrawal rate. It is important to remember that investing involves risk. There is the potential for losing money when investing in securities.
Other factors may come into play. Some years you might withdraw more for a long-cherished goal like travel. Or you might have health care needs that dictate a higher spending rate. Your plans should be flexible enough to accommodate a variety of needs.
CCL: What’s the order in which a retiree should tap into their retirement accounts?
CE: For many, the conventional wisdom goes that you withdraw from your taxable accounts first, then tax-deferred, then tax-free. That is because the money you take from a taxable account (such as a brokerage account) is likely to be taxed at the rate for capital gains or qualified dividends, which varies depending on your tax bracket. It is generally a lower rate than what you would pay on ordinary income from 401(k) plans, traditional IRAs and other tax-deferred savings.
Even if you are not ready to start withdrawing funds from your traditional IRAs and qualified retirement plans, the government generally requires you to do so once you reach a certain age. The amounts of these required minimum distributions, or RMDs, will vary from year to year, depending on your retirement account value and your age. Failing to take an RMD, or taking too little, can result in costly additional taxes. An exception may apply if you are still working. Review your employer’s plan highlights and talk with your tax advisor about your situation. Roth IRAs and, as of 2024, Roth 401(k)s do not have RMDs, so you can keep money in your account for your lifetime.
CCL: When should one claim Social Security benefits?
CE: You can begin receiving Social Security retirement benefits as early as age 62 but waiting to claim until your full retirement age (66 or 67, depending on the year you were born) or even age 70 will give you a larger monthly payment and future survivor benefits for your spouse may be greater. If you have a health condition that could limit your life span, for instance, it could make sense to start collecting Social Security income immediately after carefully considering how spousal survivor benefits may be impacted.
CCL: How should one pay for their retirement home?
CE: If you buy, you will need to decide whether to pay cash or finance the purchase. If you are selling another home, it may seem simplest to use the proceeds to buy the new one outright. Depending on your tax and income needs; however, it might be better to use part of the cash from the sale as a down payment and finance the balance with a mortgage. Check with your tax advisor about your options.
CCL: Can cost of living be higher in a low-tax state?
CE: Yes, look at the overall prices in the area where you are considering relocating — everything from utilities and groceries to health care costs and your car and homeowners insurance.
CCL: Can low-tax states make up for lost revenue in other ways that could impact one’s budget?
CE: Several of the states without an individual income tax compensate by implementing a higher state sales tax or other taxes, including taxes on necessities such as gasoline, or charging more for state services such as driver’s licenses or car registrations. Those additional costs could have a real impact on your budget.
Local property taxes also vary widely — even within a state — and a state with low (or even no) income taxes may have pockets where homeowners are hit with relatively high property taxes.
CCL: How is retirement income treated differently across states?
CE: Above certain adjusted gross income levels (plus certain modifications), you could owe federal income taxes on a portion of your Social Security benefits. But at the state level, the rules vary, with some states matching the federal approach and others exempting Social Security benefits from state income taxes (often pegged to your total income).
Another potential tax issue to explore is how your new state might treat your pension payments for income tax purposes. Among states that collect income taxes, some states may exclude all or a portion of qualifying pension income from state taxes. Always consult your tax advisor.
"For many, the conventional wisdom goes that you withdraw from your taxable accounts first, then tax-deferred, then tax-free."
Ellard advises retirees: "Always consult your tax advisor."