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Saving Money On Taxes in Retirement

Darryl Rosen • Feb 28, 2023
I want you to picture this. You just retired. The company gave you a gold watch that doesn’t capture your steps or heart rate and now you are getting ready for bed. 

Tomorrow is a new day. A day filled with endless possibilities - and questions.

Chief among them is the important question of how do I spend from my portfolio to pay my bills.

Complicating matters is the fact that you probably hold multiple account types, including taxable, tax-deferred (such as a traditional 401(k) or IRA), and tax-free (such as a Roth 401(k) or IRA). 

You should be excited but the last thought as you lay your head down is…“Do I have a withdrawal order strategy?” You may not sleep well!

A good strategy will likely minimize the total taxes paid over the course of your retirement, thereby increasing your wealth and the longevity of your portfolio. 

The impact of taxes can be minimized by spending from the portfolio in the following order: required minimum distributions (RMDs), if applicable, followed by cash flows on assets held in taxable accounts, taxable assets, and finally tax-advantaged assets. Vanguard has studied this and their research has shown that this can add up to 120 basis points of average annualized value without any additional risk. (See chart below. Green bar versus gold and blue bar is a 1.2% difference)

Vanguard compared this strategy to two alternatives in which tax-advantaged assets were tapped first: (1) spending from tax-deferred assets before taxable assets and (2) spending from tax-free assets before taxable assets. Both cases resulted in lower terminal wealth.


That’s why I’m always beating the drum about de-accumulation strategies. When you’re saving and working it’s about growing money. When your work days are behind you, it’s about much more than the rate of return. 

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