Your Retirement Income Plan needs to make sense when you're in your 90's

Here are some of the most common Retirement Income Strategies.  

  • The Bucket Strategy

  • The 4% Withdrawal Rate

  • Dividend Income

  • Social Security + Walmart Greeter

Each of these strategies has it's pros and cons.  I don't plan to dig into the details of each in this article. 

My goal today is to explain the value of simplicity with your Retirement Income Plan.  It's important to understand that whatever strategy that you choose now needs to also make sense when you're in your 80's & 90's

Let's start with a story

Here's my dad, "helping" me prep for a cross country motorcycle trip a few years ago.  

We're both a bit older now. 

My hair has thinned a noticeable amount and my dad, well... 

He's 80 now and his memory is noticeably slipping. 

He has Social Security, a small pension and money in the bank.  

This plan is simple enough and it works for him. 

But, there are some concerns.  

  • He loses his phone on a regular basis. 

  • He calls grand kids by the wrong names occasionally. 

  • If a movie has more than one plot, it's "too much" to follow.  

This WILL happen to you too...

I'm not saying that you will completely slip mentally. But, some slippage is inevitable for all of us. 


This eventual mental slipping is what I believe Retirement Income Planning should revolve around. 

Transitioning to Retirement will be much harder than you think. 

If you're in casual conversion with someone you've just met, what is one of the most common questions asked? 

"So... What do you do for a living?"  

This may seem like just a question, but it's more than that.  It's your identity.  

You've spent 30+ years building this identity.  You've also spent 30+ years building a set of habits.  

A set of habits that Retirement will turn completely on it's head. 


Make Money

Save Money

Invest Money

DON'T TOUCH that money



Is it okay to spend money? 


What about losses? 

Do you still save when you're retired?

How do I make money? 

This transition to a new set of habits is probably going to be much more difficult than you imagine. 

The fact that transitioning to Retirement can be overwhelming is one of the reasons why I believe simplicity is key.  

Ponder these two questions for a minute:

1) Do you know someone who was at/near/in retirement and was negatively affected by the stock market? 

2) How many times have you heard a pensioner complain about retirement? 

My recommended Retirement Income Plan

Let's focus on question #2 first.  The pensioner.  

If you've been a diligent saver for retirement and you live within your means, you can likely comfortably survive off of Social Security and a small draw from your investments

I believe pensioners have the best retirements. Income is regular, predictable and often times enough to (or close enough) to cover the monthly bills. 

You don't need a large investment account if Social Security and pensions cover most or all of your monthly expenses. 

But what if I don't have a pension? 

You make it yourself with an Annuity.  

Did he say annuity?  

If this is your reaction, let's first dispel a few myths. 

Proper understanding of annuities will help you understand the basis of this recommendation.  

First of all, there are three main types of annuities.  

1) Variable annuities are tied to the stock market. Typically these annuities: 

  • can be costly

  • can be complicated

  • can sometimes pay the advisor a 7% commission. 

2) Fixed (Fixed Indexed) annuities either give you a fixed rate of return, or a return tied to the stock market (that doesn't go negative). Typically these annuities: 

  • can be less costly than a variable annuity

  • can be less complicated than a variable annuity

  • can have commissions similar to variable annuities. 

3) Income annuities are setup to start paying you income immediately, or at a predetermined time (deferred).  Typically these annuities: 

  • there are typically no fees.

  • are fairly simple to understand since they just pay you income.

  • have commissions that range from 1.5% - 3%.

Let's talk about Income Annuities a bit more.  


Academic research suggests that the Income Annuity offers one of the most stable and predictable sources of retirement income.  

BUT, according to the Insured Retirement Institute(1), they only acount for about 5.5% of all annuity sales.  

Why is that? 

For the advisor that can receive commissions: 

It can be difficult to voluntarily make LESS than half as much for recommending one annuity over another. 

For the FEE ONLY planner:

It can be difficult to voluntarily take a 1.5% - 3% commission when you could charge 1% on the same assets for years to come. (fee only planners can't make commissions)

To Clarify:

I am not insinuating that any "type" of advisor is better than the other or that advisors are purposefully steering clients towards more expensive products for higher commissions. 

But, we are all humans and when you add a significant financial variable to the decision making process, it CAN cloud judgement. 

Back to the strategy

High level how this strategy works and why I recommend it. 

Step 1 to any retirement income plan is to MAXIMIZE your SOCIAL SECURITY. 

Step 2 is to buy an income annuity to fill the "gap" between your Social Security income and your essential expenses.  

This is purchased from the   Bond portion of your portfolio. 


If you're in the above 70/30 portfolio, typically an income annuity will pay you a higher rate of return than the bond portion of your portfolio.   

$120k a year is a pretty comfortable retirement income right? 

I'd certainly be happy in retirement making $10k a month.  

But the best part is next...


Yes, Zero dollars in taxes.  

Their taxable income of $72,669 put them in the 15% tax bracket. In 2017, that meant that their taxes owed on their Long Term Capital gains was ZERO%. 

This is just an example. You may not have $40,000 in itemized deductions like they did but the concept is still the same. 

If your taxable income is within the below ranges, 

You would pay   this   in long term capital gains rates

So what does this really mean for me? 

Let's first break this up into two life stages.  

  • Pre-Retirement

  • Post-Retirement


As you are building up a taxable investment account pre-retirement, you are building up an account that is fully accessible to you at any time.  

Unlike your 401k or IRA's, there is no penalty for using the funds prior to 59 1/2 years old. You just pay the taxes on any gains.  

You will likely pay some tax on these gains since you will also have income from employment, but it should still be lower than your marginal tax rate.  

This means that if you come across a buying opportunity (for a rental property, business or other investment), you would have money that is accessible. 


This is where the real power of the taxable account is.  

One of the most important recommendations I make to my clients is for the larger income earner (in a married couple) wait until age 70 to take Social Security.  

For most, this leaves up to a 5 year gap where we need to find income somewhere else.  

We'll overly simplify this example to illustrate the point.  

You Retire at 65

You Plan to take Social Security at 70


Your Annual income needs are $100,000

And you've saved up:

Pre-Tax - $500,000

Post-Tax - $500,000

Taxable - $500,000

Year One of Retirement

You live off of $100,000 from your Taxable Account.

Assuming this is all long term capital gains, you have: 

$100,000 of income from your taxable account 

- $26,100 standard deduction (assuming over age 65 and filing jointly)

$73,900 Taxable Income

This would mean you could owe ZERO TAXES.

OR... You could REALLY LEVERAGE the long term benefits of the Taxable Account.

Year One of Retirement

You live off of $100,000 from your Taxable Account.

You do a Partial Roth Conversion of $94,500.  

($100k income + $68,400 to fill up 22% tax bracket + $26,100 for your standard deduction)

You have

  • $94,500 taxed at 10, 12 & 22% brackets* = $12,506

  • $100,000 taxed at 15% = $15,000

*Assuming 2020 married filing jointly tax rates

Total potential tax paid of $27,506

Divided by your total income of $194,500 and your 

Effective tax rate is ~14%

Remember, when you contributed the money to your Pre-Tax account, this was Tax Deductible. This means you reduced your income by your contributions. It's likely that you were in a higher tax bracket then.


So in a sense you "saved" yourself from paying 22%, 24% or more in taxes. 

When you converted the money to your Post Tax account, you paid roughly 14%. 

That 8-10% difference in taxes is money you get to keep and you NEVER have to pay taxes on that money again!

1) When you contributed money here, you DEDUCTED this from your income tax while you were working (assuming 22% - 24%)

Pre-Tax - $405,500

Post-Tax - $594,500

Taxable - $400,000

2) You paid taxes on your conversion amount at roughly 14%

3) You used your Taxable money to pay your bills

You could do this strategy every year for 5 years between age 65 and 70.  (final math below is simple math, we're ignoring tax law changes and annual changes to tax brackets.)

Five Years Later (Age 70)

Pre-Tax - $27,500

Post-Tax - $972,500

Taxable - $0

Age 70 and beyond:

If you are left with your assets close to the proportion above you can potentially avoid:

  • Your Social Security benefits from being taxable.

  • Medicare surcharges due to high taxable income.

  • Being "bumped up" a tax bracket when required minimum distributions start from your Pre-Tax account.

  • Leaving assets to heirs that will be taxable to them.

DISCLAIMER: This illustration is overly simplified and merely meant to illustrate the benefit of using your taxable money for income so you can do Partial Roth conversions.


All calculations were made assuming 2020 tax rates, married filing jointly.

Tax code is very nuanced and personal. Please consult your tax advisor before you pursue this strategy. 

I've been a financial planner since 2007 and I think that Partial Roth conversions are one of the most powerful tools you can utilize. 

But, in order to fully maximize the power of Partial Roth conversions, you need to have a taxable account built up in order to use it for your income to survive, plus the tax liability of Partial Roth conversions. 

Even if you never did a Partial Roth conversion, I would still recommend building up a taxable investment account as a part of your financial planning strategy. 

A taxable investment account provides you with:

  • Options (another way to manage your taxes)

  • Flexibility (it's not tied up until 59 1/2)

With so many variables surrounding financial planning, I think two of the most underutilized topics are saving in a way that gives you the Option of paying taxes in a different way

And the Flexibility to use money at different points in your life for different goals. 

Now that you (hopefully) believe in the importance of why you need a taxable investment account, continue onto part 3 to understand why you should invest differently in each of your three accounts. 

If you are interested in learning more about taxable accounts, but don't know how to get started feel free to schedule a phone call.  We're happy to help...

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Step 3: Mange your monthly budgets as you always have because the money you need to pay essential expenses is deposited just like your previous paycheck. 

Here's why I really love this strategy

Remember that the real test of any strategy you implement is when things don't go as planned.  

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