Conventional wisdom in any area of life is far from infallible, and this is as true in retirement planning as it is in politics.
If you go by the standard recommendation for withdrawing money from various savings accounts and for taking Social Security benefits, a retiree could end up running out of savings in retirement.
William Meyer and Dr. William Reichenstein, experts in retirement planning and Social Security strategies, say they have developed new ways to calculate withdrawal strategies that will make retirement money last longer.
This is particularly important today as people are living longer and many retirees say they are afraid of running out of funds before they run out of life.
Conventional wisdom says a retiree should withdraw money from taxable accounts first, then from tax-deferred accounts such as 401(k)s and traditional IRAs, and then from tax exempt accounts such as qualified withdrawals from a Roth IRA. At the same time, starting Social Security benefits should be delayed as long as possible so the monthly benefit amount grows to its maximum when the recipient turns 70.
But there are too many moving parts to retirement income to make this true all the time, according to Meyer, founder and CEO of Social Security Solutions, a retirement planning resource for advisors, and Reichenstein, professor at the Hankamer School of Business at Baylor University, Waco, Texas.
Meyer and Reichenstein on Monday unveiled a new planning tool, Income Solver, software for advisors to help clients plan for their retirement income to make it last as long as possible. Income Solver allows advisors to test various scenarios to see how clients fare under different circumstances, withdrawing strategically from different accounts.
For instance, one example is that withdrawals from taxed and tax-deferred accounts need to be balanced so that income totals do not kick the client into a higher tax bracket for Social Security and so that Medicare Part B expenses do not go up.
The affect of required minimum distributions from tax-deferred accounts at age 70.5 also must be balanced with other income to avoid having the client pushed into a higher tax bracket at that point, the two researchers say.
The two use a hypothetical couple that has $1 million in a 401(k) and $500,000 in taxable savings to illustrate one of many possibilities. Using the conventional withdrawal strategy, their money will last approximately 39 years if they spend a little more than $100,000 a year.