Case Study of Retirement Withdrawal Strategy for a Married Couple Ages 62 and 65

One way to illustrate important concepts in retirement planning is through a case study. In this case study, we learn about an optimal withdrawal strategy for retirement savings. Planning a strategic withdrawal from retirement accounts can significantly impact the longevity of your retirement savings, tax efficiency, and Social Security benefits. 

In this scenario, we have a married couple who have just retired—one spouse is 62 years old (retired teacher), and the other is 65 (retired professor). They are considering how best to structure their withdrawals while balancing their tax liabilities and Social Security claiming strategies. Remember, this is one scenario; talk to your financial advisor for a customer-tailored financial plan.

Financial Overview:

• Savings Account: $100,000
• Taxable Brokerage Account: $300,000
• Roth IRA: $200,000
• Traditional IRA: $800,000
• Pension (non-inflation indexed): $3,000 per month for the 65-year-old spouse
• Social Security Benefits:
  • 62-year-old: $1,500 per month at Full Retirement Age (FRA)
  • 65-year-old: $3,500 per month at FRA
• Current Income from Pension: $3,000 per month ($36,000 per year)

Given this situation, let's break down a possible withdrawal strategy.

Step 1: Delay Social Security Benefits

Delaying Social Security benefits is one of the most effective ways to maximize lifetime income, particularly for the spouse with the higher benefit.

• For the 65-year-old: Delaying Social Security until age 70 would increase their monthly benefit by 8% per year, resulting in a benefit of about $4,620 per month at age 70. This is especially important because Social Security provides inflation protection, unlike their pension.
• For the 62-year-old: Delaying Social Security until FRA (age 67) would result in a full benefit of $1,500 per month. If they wait until age 70, this benefit would increase to about $1,860 per month.

Delaying Social Security is particularly beneficial when there is other income to cover living expenses, such as the 65-year-old’s pension.

Step 2: Use the Pension and Taxable Accounts for Income First

Since the couple has a pension of $3,000 per month (or $36,000 annually) and significant taxable investments, they can cover their immediate income needs by combining the pension with withdrawals from their taxable brokerage account and savings.

• Annual Income Needs: Estimate how much they need beyond the pension for living expenses. For example, if their annual expenses are $80,000, the pension covers $36,000, leaving a gap of $44,000.
• Withdraw from the Taxable Brokerage Account: The first step would be to tap the taxable brokerage account, withdrawing enough to bridge the gap. This is tax-efficient because they’ll primarily be paying capital gains tax, which is often lower than ordinary income tax rates. This also allows the Roth IRA and traditional IRA to continue growing tax-advantaged.

By using the pension and taxable accounts first, they avoid triggering higher tax brackets by delaying withdrawals from the traditional IRA.

Step 3: Consider Roth IRA Conversions

Since the couple is currently not receiving Social Security, their taxable income might be relatively low. This provides a window of opportunity to strategically convert some funds from the traditional IRA to the Roth IRA before RMDs start at age 73. This helps in two ways:

1. Reduces Future RMDs: Converting part of the traditional IRA into the Roth reduces the balance in the traditional IRA, which decreases the size of future Required Minimum Distributions (RMDs) and lowers future tax burdens.
2. Maximizes Tax-Free Growth: The Roth IRA grows tax-free, and distributions in retirement are not taxed. Moving assets into the Roth now, while in lower tax brackets, can be beneficial.

The couple should aim to convert amounts that won’t push them into a significantly higher tax bracket but will take advantage of their current lower taxable income. Roth conversions ideally should be determined each tax year, and the amount that needs to be converted to keep within a lower tax bracket.

Step 4: Minimize Traditional IRA Withdrawals Until RMDs

It’s best to avoid tapping into the traditional IRA early unless necessary. The traditional IRA withdrawals will be taxed as ordinary income, and taking withdrawals before RMDs are required (starting at age 73) may result in higher taxes if not planned properly. The couple can defer withdrawals from this account for as long as possible, allowing for continued tax-deferred growth.

Step 5: Tap into the Roth IRA Last

The Roth IRA should be the last account the couple withdraws from, if possible. Since Roth IRA withdrawals are tax-free, allowing the Roth to continue growing helps maximize their overall wealth. Additionally, the Roth IRA can serve as a reserve for unexpected large expenses or if the couple needs to supplement income without triggering a tax liability.

The Roth IRA could also be left as a legacy for heirs, as Roth IRA balances pass to beneficiaries tax-free.

Step 6: Manage RMDs and Social Security Coordination

Once the 65-year-old reaches age 73 and RMDs kick in, the couple will need to start withdrawing from the traditional IRA. The amount will depend on the IRS life expectancy tables, but by delaying Social Security and converting some traditional IRA assets into the Roth IRA, they will have reduced the size of their RMDs, making these withdrawals more manageable.

By age 70, both spouses will start receiving their maximized Social Security benefits, adding approximately $6,480 per month to their income (from both Social Security payments). This, combined with their pension, should cover the majority of their income needs, allowing them to rely less on their retirement accounts.

Summary of the Strategy:

1. Delay Social Security: The 65-year-old should delay Social Security until age 70 for a larger inflation-protected benefit. The 62-year-old should also delay as long as possible, preferably to FRA or age 70.
2. Use Taxable Accounts First: Withdraw from the taxable brokerage account to cover income gaps and minimize tax impacts early in retirement.
3. Roth Conversions: Convert traditional IRA funds to the Roth IRA in years where income is lower to minimize future RMDs and taxes.
4. Minimize Traditional IRA Withdrawals: Avoid taking from the traditional IRA until RMDs are required at age 73.
5. Tap Roth IRA Last: Use the Roth IRA as a tax-free resource later in retirement or as a legacy asset.

By following this plan, the couple can maximize their Social Security benefits, minimize taxes, and ensure their retirement savings last longer. This case study is for illustrative purposes only. Talk to a financial planner to see what strategy best suits your retirement goals. 

*This content is developed from sources believed to be providing accurate information. The information provided is not written or intended as tax or legal advice and may not be relied on to avoid federal tax penalties. Individuals are encouraged to seek advice from their own tax or legal counsel. Individuals involved in the estate planning should work with an estate planning team, including personal legal or tax counsel. Neither the information presented nor any opinion expressed constitutes a representation of a specific investment or the purchase or sale of any securities. Asset allocation and diversification do not ensure a profit or protect against loss in declining markets.