Mind tax concerns to stretch retirement nest egg


In addition - we didn’t mention this - Social Security cost-of-living increases would be based on this higher amount, and your spouse would be eligible for higher survivor benefits.

That all sounds fine, you say, but how about the years of benefits I give up by delaying? How do I generate the income I need if I retire, say, at age 62 but don’t start tapping Social Security benefits until age 67?

Good questions, and we’ll address them by delving into a report by the Fidelity Research Institute that examines new strategies for generating lifetime income.

The report, which formed the basis of last week’s column, also suggests that many Americans could benefit by bridge strategies to generate income until they start drawing benefits, and by minimizing the impact of taxes as they draw from their savings.

Take for example a couple retiring at age 62 with $1 million in savings, a diversified portfolio of 50 percent stocks, 40 percent bonds and 10 percent cash, and projected first-year retirement expenses of $67,000 that go up each year with inflation.

If the couple starts drawing Social Security benefits at age 62, they risk running out of money at age 84, based on the Fidelity analysis. If they retire at 62 but don’t tap Social Security benefits until age 67, the money is likely to last until age 89, because of the higher inflation-adjusted benefit. And their money would be expected to last until age 94 if they both delay taking benefits and use 30 percent of their savings to buy an immediate annuity that guarantees an annual income.

This allows for the couple to bridge their income until Social Security payments begin, the report said.

As the report cautions, this example “is not meant to recommend any one approach to funding a retirement lifestyle.” But it does “reinforce how important it is to at least take the time” to plan and consider all choices.

Among the critical choices is deciding in what order to withdraw money from our savings to minimize taxes. The usual recommendation, once any minimum required distributions are taken from IRAs and qualified plans, is first to take money out of taxable accounts, preferably if you can also claim a tax loss - for example, selling a stock or mutual fund for less than you paid for it. We are told that accounts such as long-held Roth IRAs from which withdrawals are tax-free should be the last to be touched so the money keeps growing tax-free.

But the conventional wisdom does not always apply.

In one scenario in the report, for example, a middle class couple retiring at age 65 reduced their annual tax bill from $5,346 to a mere $260 by mixing withdrawals from both the husband’s deductible rollover IRA and the wife’s tax-exempt Roth IRA, rather than taking them all from the rollover IRA.

The reason: Roth IRA withdrawals do not count as income when determining how much of Social Security benefits are taxable, but withdrawals from traditional IRAs do.

An important point the report emphasizes is that the goal of a wise tax withdrawal strategy is not necessarily to keep next year’s tax bill as low as possible, but to lower taxes over the long term. It may make sense to start taking money out of deductible IRAs before you need it, and pay taxes on it, to avoid a larger taxable mandatory withdrawal later on.

“With the same nest egg you may be able to extend your retirement income three to five years, just by how your withdraw the money” to minimize taxes, said W. Van Harlow, managing director for the Institute. A copy of the report is available at

Humberto and Georgina Cruz are a husband-and-wife writing team who work together in this column. Send questions and comments to or