For most people, Social Security is key to their retirement. According to a 2024 survey by the Seniors Alliance, 67% of seniors receive more than half of their total income in benefits from government-run programs. (1)
However, if you’re one of the one-third of seniors who have a substantial source of income in addition to Social Security (perhaps a 401(k) plan or a traditional corporate pension), your biggest challenge in retirement will be minimizing your tax burden.
Without a sound plan, you may be at risk of overpaying taxes on various sources of income, and may even increase the risk of depleting your estate.
To mitigate this risk, identify your retirement priorities and develop a plan to leverage a variety of sources in sequence to minimize costs.
Before you prioritize your income sources, it’s important to have a good idea of ​​what your priorities will be in retirement.
For example, 20% of retirees said creating a legacy or financial legacy is a top priority, according to a 2023 report from the Pan American Center for Retirement Research. (2) If this is also your priority, you need to prioritize your various sources of income to maximize the size of your savings for as long as possible. This could mean less revenue upfront.
On the other hand, some retirees want to maximize their income and lifestyle expenses while they are younger and healthier. Your late 50s and early 60s can be the so-called “busy years” when you enjoy traveling and indulging in hobbies that require a certain level of fitness.
Retirees surveyed by TransAmerica are more worried about their declining health and need for long-term care (35%) than about depleting their savings and investments (32%).
If this is your top priority, you may want to sequence your income to provide you with more cash up front while managing a lower tax liability.
Once you determine your priorities, you can work with a financial advisor to develop a comprehensive strategy for collecting retirement income from a variety of sources.
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You’re in a unique position if your retirement plan includes not just Social Security income but also tax-advantaged accounts like traditional IRAs and 401(k) plans, as well as a defined benefit pension.
According to the Bureau of Labor Statistics, only 14% of private sector workers have access to traditional pensions. (3) While you are more likely to receive this special benefit if you are older or a government employee, most workers do not have this additional source of income when they retire.
Unfortunately, if you have this guaranteed source of income, it can easily become a guaranteed source of tax liability if you don’t properly plan for withdrawals from taxable accounts and Social Security.
With this in mind, there are two other revenue streams you can structure based on your priorities. For example, if your priority is enjoying the good times in life, you might decide to retire early and withdraw your 401(k) with tax benefits. This reduces the minimum distribution you must take when you are 73 and older.
The 401(k)-pension-Social Security sequence should allow you to make the most of your golden retirement while minimizing taxes later in life when you rely on sources of income you have no control over.
On the other hand, if your priority is maximizing the size of your estate, you can take a traditional pension as early as you qualify.
Depending on your situation, this may put you in a lower tax bracket, allowing you to strategically convert your 401(k) and IRA balances to a Roth IRA. You can also delay your Social Security claim to extend the prime window for Roth conversions.
This sequencing of pension priorities should enable you to keep your money in appreciating assets for as long as possible to enjoy substantial gains that can be passed on to your loved ones.
The order in which you withdraw money depends on your retirement priorities and lifestyle. When you have multiple sources of retirement income, there’s no right answer as to which one you should prioritize.
But the wrong answer is to make these decisions in isolation. Each decision affects your other sources of income and your total tax burden. So consider them part of the same ecosystem and plan your withdrawals strategically.
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Alliance for Seniors (1); Pan American Center for Retirement Research (2); U.S. Bureau of Labor Statistics (3).
This article provides information only and should not be considered advice. It is provided without any warranty of any kind.
