What the 1% Get Right About Retirement Withdrawals

The pressure to manage retirement funds wisely is real, as many retirees are concerned about running out of money. But there’s a group that seems to navigate retirement with confidence and ease: the top 1%.

Many of these high-net-worth individuals have learned to manage their retirement withdrawals with intention and discipline. While their wealth gives them advantages, their approach to retirement withdrawals offers valuable lessons that anyone can apply, regardless of income.

Retirement Withdrawal Strategies Used by the Top 1%

Many people approaching retirement worry about outliving their savings. The 4% rule is a long-standing guideline that suggests retirees withdraw 4% of their portfolio in the first year and make annual inflation adjustments every after that. Ideally, funds will last for 30 years, but this isn’t always the most effective strategy.

The top 1% of retirees see retirement as a long-term financial plan rather than a time to stop working. Rather than relying on one rule-of-thumb, they use a combination of flexible, tax-smart withdrawal strategies.

“With high-net-worth individuals, their families typically have multiple income sources. They can have diverse investment portfolios as well as tax planning and estate planning goals, so we see more complex strategies that require more planning,” said Alissa Todd, personal chief financial officer and wealth advisor at The Wealth Consulting Group.

Strategically Withdraw From Different Accounts

High-net-worth individuals are very intentional about which accounts they withdraw from and when.

They strategically prioritize taxable, tax-deferred, and tax-free accounts, which allows them to avoid being in higher tax brackets and reduces their tax liability. “A large portion of the withdrawal strategy is tax-efficient withdrawal sequencing, with the goal of it being to minimize lifetime tax liability and to preserve your portfolio,” Todd explained.

Roth Conversions

With Roth IRAs—unlike traditional IRAs—people pay taxes on their upfront contributions and don’t have to pay taxes when they take distributions in retirement. Plus, Roth IRAs don’t have required minimum distributions (RMDs), so your money can grow tax-free throughout your lifetime.

Many in the top 1% leverage Roth conversions to reduce RMDs and future tax liabilities. During a Roth conversion, a traditional IRA or 401(k) is converted into a Roth IRA. You’ll be required to pay taxes on the amount you convert, as that money will be characterized as taxable income in the year you take the conversion.

Charitable Giving

Philanthropy is often an integral part of the financial plans of high-net-worth individuals. It is a way to fulfill their goals when it comes to giving back, but also to preserve their wealth and legacy.

Since charitable contributions can lower an individual’s tax liability, they serve as an effective tax-saving tool.

For example, if you itemize your deductions, you can deduct certain charitable contributions worth up to 60% of your adjusted gross income (AGI).

Before implementing any of these strategies, high-net-worth individuals should gain a solid understanding of how taxes impact their overall financial planning. Collaboration with financial experts allows for a comprehensive approach that maximizes tax efficiency.

“A really big thing is understanding how taxes work, so working with their CPA or their EA or financial advisor all together [is important] so they can minimize lifetime tax liability…” said Todd.

Tips for the Average Retiree

You don’t need millions to adopt these strategies, but creating a strategic plan that addresses how and when to draw from various accounts can significantly improve the sustainability of your retirement savings.

“Having a systematic drawdown plan helps you create income, preserve wealth, manage taxes, and avoid costly mistakes,” said Todd.

Plan Withdrawals with Taxes in Mind

When and how you draw from different accounts can significantly impact your overall tax liability.

By strategically withdrawing from tax-deferred accounts, Roth IRAs, and taxable accounts, retirees can reduce the amount they pay in taxes, potentially increasing the amount they can spend and preserving their wealth for longer.

“Being mindful and having a strategy in place on which accounts you’re going to start taking withdrawals from first, and knowing the tax features of different investment accounts. There’s a strategic order that can be beneficial to follow,” said Todd.

Think about incorporating charitable giving: Charitable giving is rewarding in more ways than one. Not only can you meet your philanthropic goals, but you may have the option to donate directly from certain accounts, which lowers your tax liability and helps your savings last longer.

“If you are already giving to two different charities and organizations, you might not be aware that there are ways to do it on a more tax-efficient basis. There are things like qualified charitable distributions, or QCDs, or donor-advised funds, or charitable remainder trusts,” Todd explained.

Work with a team: If you want a well-rounded withdrawal strategy, consult with experts who can guide you through all aspects of retirement, from taxes to estate planning.

“Having someone you can plan with so you’re not doing it yourself is another big thing. Work with a tax professional, a financial advisor, and an estate planning attorney, so that it’s being effectively managed,” Todd recommended.

Revisit your plan: The top 1% don’t set it and forget it, and neither should you. To ensure that your withdrawal plan is successful, revisit and make adjustments when needed, especially when laws or regulations change or a major life event occurs.

“Any life event is when we would revisit or update a withdrawal strategy. For example, when a spouse passes away, that affects your tax filing status and RMDs. We keep an eye out for policy changes and tax law changes. If there are any changes in tax bracket, capital gains rules, or state tax laws, we want to make sure our clients’ withdrawal strategies get updated,” said Todd.

The Bottom Line

Retirement isn’t just about how much you save, it’s about how strategically you withdraw your money and spend it.

While the wealthy have many resources, their approach to withdrawals allows them to remain comfortable throughout retirement.

By adopting some of their strategies, anyone can enhance their chances of financial stability in retirement.

“There’s a positive effect that comes from proactive planning. Sometimes these strategies are layered, but doing these with intention can often give you more favorable results,” Todd stated.