Personal Finance

What is your IRA spend plan in your retirement years?

John Seetoo

Published: January 18, 2025 1:36 pm

The prospect of retirement and leaving the drudgery of the workforce is an appealing prospect for many. The topic of retirement savings and investing strategies in order to maximize portfolio growth subsequent to retirement has mushroomed in popularity. The F.I.R.E. (Financial Independence Retire Early) ethos has gone viral with Millennials and Gen-Zers whose goal is to retire young enough before the average retirement age in order to enjoy the extra time for other pursuits.

However, accumulating and growing the retirement nest egg portfolio is only half of the equation. Formulating a strategy for drawing down, spending, and managing funds during retirement can be a daunting undertaking if one is unprepared. Accounting for cost of living increases, inflation, varying tax brackets, supplemental income from other sources, and post-demise financial plans are all topics that require assessment and proactive action, in most cases, in order to avoid unpleasant consequences. Add new technologies, legislation, and other geopolitical events to the equation, and the landscape can suddenly transform into a brave new world unlike what preceded it less than a quarter century ago. 

Helming the post-retirement Galaxy

A retiree posted a query on Reddit seeking suggestions and ideas from other retirees on their respective spending plans, strategies, and portfolio management tips. He had been consulting with a financial advisor, but wanted to get practical information from people who may have come up with innovation by thinking outside the box. Among the issues and questions he asked about included:

• Should spending be budgeted to match generated portfolio income, so that the principal remains undisturbed and unencumbered towards further growth?
• Is it wise to adjust spending for inflation, or should a fixed drawdown be maintained for principal preservation and spending habits adjusted accordingly?
• Should drawdown amounts be based on depleting the account close to one’s life expectancy?
• If one wishes to leave legacy funds for children or grandchildren, how should this be arranged?
• If one has an interest in donating to charitable institutions, are there different protocols for tax deductions, etc.?
• Did anyone have suggestions for contingencies in dealing with the above topics in as far as the context of environmental, social, and economic uncertainty?

Astrogation Guidance

The breadth of responses was varied, but a number of advice tips also addressed issues pertaining to, but not specifically concerning his questions. 

Budgeting: Concurring opinions regarding creating a spend plan budget were fairly unanimous. Guidance on creating a budget from financial companies like SmartAsset, as well as apps and software from such entities as boldin.com or Engaging Data’s “Rich, Broke or Dead?” calculator are just some of the possible resources to consider. Spending Schedules is a topic that should be assessed on a case-by-case basis, based on lifestyle requirements, health, income, IRA size, and personal wishes for fund allocations. The drawdown amounts would need to be determined once the following factors are included in the equation:

• Size of Each Retirement Asset – While the IRA may have been intended to cover living expenses, does the account holder also have an HSA for long-term health and medical care? If not, then the IRA fund might have to be tapped to cover any shortfalls leftover if Medicare is insufficient. 
• Investment Asset Class – With regard to the principal amounts in the retirement account, the success of a retiree’s plans can largely be contingent on the asset class it contains. If the goal is to generate a certain amount of income while maintaining a fairly stable principal balance, then high-yielding, dividend-generating investments will be required. High-yield ETFs, REITs, or BDCs can deliver annual dividends yielding as high as double digits in some cases, should such a level of income be desired. Otherwise, if the retiree wants to stay in a growth oriented strategy and just sell off bits as needed, that is possible, but arguably riskier and less reliable if a steady annual income is the goal.
• Surviving Spousal Security: A majority of spending plans include for one’s spouse as well, especially if the spouse does not have his or her own retirement account. Spending plans may also need to account for a surviving spouse’s lifestyle and long-term healthcare when a retiree dies, since an HSA account becomes taxable income to a beneficiary and does not confer any HSA benefits. 
• Inheritances and Gifts: Depending on the size of one’s nest egg and how much surplus it may hold beyond the retiree’s needs, both expected and unexpected, there are ways to transfer funds to one’s children and grandchildren safely without triggering excessive taxation. Starting in 2025, the Gift Tax exclusion is $19,000. Therefore, if one wishes to reduce an estate size to avoid the Death Tax, annual amounts in the form of gifts under the $19k threshold should be issued to blood heirs in advance of one’s demise.  If one wishes to bequeath or give stock, they should consider transferring the stock itself, since it automatically resets its basis price to market price at the day of transfer, thus negating any accrued capital gains taxes being passed on to the recipients.
• Charitable Institutions – Donations to charitable institutions are tax deductible, so timing them to coincide with a possible influx of funds that might bump one up to a higher tax bracket is when these donations should be scheduled. As stocks and bonds can also be donated and deducted on a tax return, donations in negotiable securities should also be considered in order to avoid capital gains taxes for the donor. 

Account Management: IRAs are tax-deferred, so withdrawals are taxed as income at one’s tax-bracket. However, there are some wrinkles with IRAs where proactive steps can help to legally minimize taxes.

• RMD: Depending on one’s age after they have reached 70, the Required Minimum Distribution protocol for tax deferred retirement accounts kicks in at different percentages off the gross amount of saved funds. The formula is calculated by factoring in one’s average life expectancy, retirement balance from Dec. 31st of the previous year, and distribution period. Unsurprisingly, these distributions are taxed as income. Depending on the size of one’s annual RMD, it can possibly bump a retiree up to a higher tax bracket, which would subsequently take a bite from other elements comprising their gross income. As the sum of the RMD can vary each year depending on the size of the portfolio, accumulating deductions that can be deferred towards those years when the RMD sum is larger is a strategy to bear in mind. 
• Roth Conversions: For those retirees whose tax brackets are expected to be higher in one’s golden years due to other income, Roth IRA conversions while one is still in a lower bracket is a suggested consideration. Another benefit of Roth IRA conversions is that when one passes, a sizable tax-deferred portfolio creates a large tax burden on the designated beneficiaries. With taxes already paid during a Roth conversion, this problem is eliminated. 

Supplemental Income: Given the fact that a number of members of Congress have already warned about potential Social Security and Medicare insolvency in the next decade, creating ancillary sources of passive income is an area worth further exploration. Nevertheless, until such time as they are no longer available, both entitlements should be part of the spend plan equation. Other considerations include:

• Pensions: Depending on one’s occupation, a pension can be a significant source of retirement income that often will dictate the scheduling and amount of retirement account withdrawals. It will also be a determinant factor for categorizing one’s retirement period tax bracket.
• Real Estate Rental Income: Whether it be investing in a REIT on a smaller scale or physical property, rental income is a fundamental source of passive income that has benefited millions of people, from the widow renting the basement apartment of her house to the skyscrapers of billionaire US President Donald Trump. Rental Income is impervious to inflation, and a reliable enough income source for banks to accept it as collateral for loan financing.
• Side Hustles: People who have sufficient depth of knowledge about a hobby or skills in services or with products outside of their regular vocations can create a side hustle for supplemental income. By forming an LLC or an S-Corp., one can declare a business and deduct expenses normally not reimbursed. As a small startup business, one may even apply the expenses against other passive income one might earn. The IRS will allow this to remain an ongoing concern provided 2 out of 5 years of operation show a profit. 

Taxes:  The subject of taxes is something far beyond the scope of this article. However, one of the respondents offered the following tip regarding long-term care, which might be useful for disabled spouses:

• In one case where a dementia patient required memory care, assisted living, and home health care with visiting nurse service, a CPA was able to write off the entire assisted living cost as a medical care deduction. Tax-deferred savings were used, but incurred no Federal taxes, thanks to the deduction.