Why Baby Boomers Need a Financial Advisor

For baby boomers entering or already in retirement, financial decisions have never been more complex—or more consequential. You’ve worked a lifetime to build your wealth, and the stakes are high: protecting your savings, generating reliable income, managing taxes, and leaving a meaningful legacy. The challenge isn’t just growing assets—it’s using them wisely, sustainably, and with confidence.

At Good Life Wealth Management, we understand that investors between 55 and 75 face a unique set of financial questions that require expertise, objectivity, and proactive planning. That’s where partnering with a fiduciary financial advisor and Certified Financial Planner™ (CFP®) can make a measurable difference in your family’s financial well-being.

The Challenges Facing Affluent Pre-Retirees

For individuals and couples with $1 million to $5 million in investable assets, retirement planning is both an opportunity and a challenge. While you may have more financial flexibility than most, higher net worth also brings more complexity—and greater tax exposure. Here are the most common issues affluent pre-retirees face:

Decumulation Strategy:
You’ve spent decades accumulating assets. But when and how should you begin drawing from them? Without a plan, it’s easy to pay unnecessary taxes or deplete accounts too quickly. Coordinating withdrawals from taxable, tax-deferred, and Roth accounts requires precise planning to maximize after-tax income and longevity of assets.
Tax Management and Roth Conversion Timing:
The years between retirement and age 73 (when RMDs begin) often present the best window for Roth conversions and other tax-optimization strategies. A fiduciary advisor models these moves to minimize lifetime tax liability, not just this year’s return.
Market Risk and Sequence of Returns:
Even affluent retirees can face shortfalls if markets decline early in retirement. A thoughtful investment strategy—emphasizing risk management, income diversification, and behavioral discipline—can protect against that risk.
Rising Health Care and Long-Term Care Costs:
With health care inflation outpacing general inflation, even wealthy families must plan for potentially hundreds of thousands of dollars in out-of-pocket costs. A CFP® can help evaluate insurance options, long-term care funding, and how these expenses fit into your financial plan.
Estate and Legacy Planning:
The SECURE Act has changed how beneficiaries inherit IRAs, and tax laws are constantly evolving. High-net-worth families need coordinated strategies among their advisor, attorney, and CPA to preserve wealth and ensure an efficient, meaningful transfer to the next generation.
Behavioral and Emotional Challenges:
Many successful individuals are highly capable but still feel uncertain when managing large sums in retirement. The shift from saving to spending, and from working to living off your portfolio, can feel uncomfortable. A trusted fiduciary advisor provides reassurance through data-driven planning, transparency, and accountability.

Why Work with a Fiduciary Financial Advisor?

Not all financial professionals are required to act in your best interest. Brokers and agents may recommend products that pay higher commissions, even if they’re not ideal for you. A fiduciary advisor, on the other hand, is legally and ethically bound to act solely in your best interest—without product incentives or conflicts of interest.

At Good Life Wealth Management, our fiduciary standard means:

Objective advice. We recommend strategies because they fit your goals—not because of any outside incentive.
Fee transparency. Our compensation is clear, predictable, and aligned with your success.
Comprehensive oversight. We coordinate your investments, taxes, estate plan, insurance, and retirement income strategy under one cohesive plan.

The Value a CFP® Brings to Your Financial Life

A Certified Financial Planner™ brings a level of rigor and expertise that goes beyond investment management. CFP® professionals complete advanced training and adhere to strict ethical standards, focusing on every aspect of your financial well-being.

For baby boomers, that means:

Customized Retirement Income Planning: Creating a tax-efficient withdrawal strategy that provides predictable income without depleting principal too soon.
Investment Management Tailored to Your Goals: Balancing growth, income, and preservation through a disciplined, evidence-based approach.
Tax-Aware Portfolio Construction: Using asset location and tax-loss harvesting to improve after-tax returns.
Social Security and Medicare Optimization: Timing benefits strategically and avoiding costly IRMAA surcharges.
Charitable and Legacy Planning: Aligning your wealth with your values through donor-advised funds, QCDs, and trust structures.
Behavioral Coaching: Helping clients avoid emotional mistakes during volatile markets, maintaining focus on long-term goals.

Studies by Vanguard and Morningstar have shown that working with a professional advisor can add 3% or more per year in net returns through better behavioral discipline, rebalancing, and tax efficiency. But beyond numbers, the real value of a trusted advisor is peace of mind—the confidence that you’re on track and making wise decisions.

How a Fiduciary Advisor Simplifies Complexity

Affluent families often have multiple accounts, business holdings, or real estate investments. A fiduciary advisor serves as your financial quarterback, bringing everything together into one cohesive strategy.

We help you see the full picture—net worth, cash flow, taxes, and investments—in one plan.
We coordinate with your CPA and attorney to ensure that tax and estate decisions align.
We proactively adjust your plan as tax laws, markets, and life circumstances change.

This holistic approach ensures your wealth works efficiently for you today, while positioning your legacy for tomorrow.

The True Benefit: Financial Confidence and Freedom

Ultimately, the goal of financial planning isn’t just to accumulate wealth—it’s to create the freedom to live your best life. For baby boomers entering retirement, that means:

Knowing your income is secure regardless of market conditions.
Paying only the taxes you owe—and not a dollar more.
Protecting your spouse and family from uncertainty.
Having a clear legacy plan that reflects your values and priorities.

At Good Life Wealth Management, we believe your retirement years should be a time of clarity, not confusion; of confidence, not anxiety. Working with a fiduciary CFP® ensures that every financial decision is guided by your goals, your timeline, and your values.

Take the Next Step Toward Financial Clarity

If you’re approaching retirement or already there, now is the time to build a comprehensive plan. The right guidance today can make all the difference over the next 20–30 years.

We invite you to schedule a conversation with Good Life Wealth Management to see how our fiduciary, evidence-based approach can help you protect, grow, and enjoy your wealth with confidence.

Falling Interest Rates: Why MYGAs Belong in Your Portfolio

The Federal Reserve cut the Fed Funds rate by 0.25% this week, with more reductions likely ahead. As inflation cools and employment weakens, bond yields are already dropping. This is a problem for retirees: many bonds are callable, meaning issuers redeem them early and reissue at lower rates. Investors who held 5.5% and 5% bonds are seeing them called and replaced with yields closer to 4%.

For retirees relying on bond income—or taking RMDs—this environment means lower expected returns from balanced portfolios. And with U.S. stocks expensive and possibly due for a correction, conservative investors should not depend on equities for stable income.

Enter the MYGA

A MYGA (Multi-Year Guaranteed Annuity) is a fixed-rate annuity that behaves like a CD but often pays more. MYGAs currently offer rates in the mid-5% range and unlike many bonds or CDs, they are non-callable. That means your rate is locked for the full term (3–10 years), even if market yields fall.

Benefits of MYGAs:

Guaranteed fixed rate of return, non-callable.
Principal protection—very safe.
Tax-deferred growth until withdrawal.
Option for tax-free rollover at maturity (1035 exchange).
Creditor protection in many states.
Nearly 2% higher than comparable 5-year Treasury (5.6% versus 3.7%).

The Fine Print:

Limited liquidity; surrender charges for early withdrawals.
Some MYGAs allow interest to be withdrawn, others none.
Withdrawals before age 59½ may face a 10% IRS penalty on earnings.
Best suited for investors with sufficient liquidity elsewhere.

Why MYGAs Belong in Portfolios Now

With rates expected to trend lower, locking in today’s 5%+ yields through a MYGA can secure income for years. A callable bond at 5.5% may vanish if rates fall, but a 5.5% MYGA will not. This makes MYGAs particularly attractive for retirees and conservative investors looking for income stability.

Strategies for Using MYGAs:

Fixed Income Replacement: Substitute part of your bond allocation with a MYGA to boost yield and avoid call risk.
Laddering: Buy multiple MYGAs with staggered maturities to improve liquidity and reinvestment flexibility.
RMD Support: Use MYGA interest or partial withdrawals to help cover RMDs without tapping into equities in down markets.

Is a MYGA Right for You?

If you’re over 59 1/2, have significant fixed-income holdings, and don’t need immediate access to these funds, a MYGA may be an excellent fit. For many retirees, locking in 5%+ guaranteed and tax-deferred is far more attractive than taking chances on callable bonds or expensive equities.

Extra Catch-Up Contributions for 2025

Posted On October 5, 2024 By Scott Stratton, CFP(R), CFA In Retirement Planning /

There are extra catch-up contributions for 2025 which will allow some investors to save even more. The SECURE Act 2.0 allows savers age 60 to 63 to contribute a higher catch-up amount to their 401(k), 403(b), or SIMPLE IRA plans. These amounts are 50% more than the regular catch-up contributions for savers age 50+. Along with this good news, I’m afraid there is also some bad news which will impact many of my readers. Congress giveth and Congress taketh away. Here are the details.

What Age?

First, an important definition for retirement plans. When we talk about your age for 2025, that is the age you are at the end of the year, on December 31, 2025. You could be 59 for most of the year, but as long as you turn 60 before the end of the year, you treat the whole year as if you are 60. There are no partial years or pro-rated benefits. You may be 49 most of the year, but as long as you are 50 on December 31, you are 50 for the whole year.

Contribution Limits for 2025

401(k) and 403(b)

Under age 50: $24,000
Age 50+: plus a $7,500 catch-up = $31,500
Age 60-63 only: a $11,250 catch-up = $35,250

SIMPLE IRAs

Under 50: $16,500
Age 50+: plus a catch-up of $3,500 = $20,000
Age 60-63 only: a $5,250 catch-up = $21,750

Please note that the larger catch-up will apply only from age 60 to 63. The year when you turn 64, the catch-up amount drops back down to the regular age 50 catch-up amount.

New Limits on High Earners

There’s a new problem for high-earners, which will take effect the following year. Starting January 1, 2026, if you make over $145,000, you can make catch-up contributions only into a Roth 401(k). Those catch-up contributions will be after-tax, not tax-deductible. This will be based on your prior year (2025) wages. Your employer will have to determine if you are eligible to make traditional catch-up contributions, or if you will only be allowed to make Roth catch-up contributions. Either way, you can still make the normal contribution (presently $24,000) into your traditional 401(k). This limitation will only impact the catch-up contributions.

One Step Forward, Two Steps Backwards

You got all excited to learn about the extra catch-up contributions for 2025. It’s a small amount for only four years of your life, but thank you, Washington, for thinking of us. And the following year, they take away the ability to deduct the catch-up contribution for everyone over 50 who makes above $145,000. If you planned to work to 65 or 70, you just lost 15 to 20 years of tax-deductible catch-up contributions.

This hurts because in your working years, you might be paying 24%, 32%, 35% or more in Income taxes. You want those 401(k) deductions in your prime earning years. Once you are retired, you will be in a lower tax bracket, maybe 12% or 22%. Starting in 2026, they’re making you pay taxes on your catch-up contributions and paying the higher taxes today.

Saving is your responsibility. Most of us don’t work for an employer who provides a generous pension plan. We face a looming Social Security crisis in less than a decade now. I haven’t met too many people who felt they had over-saved for retirement. But I have met a lot who are concerned that they are behind or not on-track for a comfortable retirement. And that is what we do here at Good Life Wealth Management everyday – think, plan, and deliver on your retirement goals.

What is a MYGA Annuity?

Posted On March 7, 2024 By Scott Stratton, CFP(R), CFA In Portfolio Management, Retirement Planning /

A MYGA is a Multi-Year Guarantee Annuity. It is also called a Fixed-Rate Annuity and behaves somewhat like a CD. There is a fixed rate of return for a set term, typically 3-10 years. At the end of the term, you can walk away with your money or reinvest it into another annuity or something else. Today’s MYGA rates are in the mid-5% range, the best they have been in a decade.

Annuities are one of the most confusing insurance products for consumers because there are so many varieties. In addition to MYGAs, there are Variable Annuities, Fixed Index Annuities, and Single Premium Immediate Annuities (SPIAs). Some of these are expensive, illiquid, and have quite a poor reputation. That’s because the Variable and Index annuities can pay a high commission, and have been sold by unscrupulous insurance agents to clients who didn’t understand what they were buying. States have been cracking down on bad agents, but even now, some of these products are highly complex and difficult to understand how they actually work. They are a tool for a very specific job and investors have to make sure that it is right for them. Unfortunately, with some agents, their only tool is a hammer, so every problem looks like a nail.

Why I like MYGAs

I do like MYGAs and think they are a good fit for some of my clients. Unlike the other annuities, MYGAs are simple and easy to understand. I have some of my own money in a MYGA and will probably add more over time. We consider a MYGA to be part of our fixed income allocation. For example, we may have a target portfolio of 60/40 – 60% stocks and 40% fixed income – and a MYGA can be part of the 40%.

Here are some of the benefits of a MYGA:

Fixed rate of return, set for the duration of the term. Non-callable (more about this below).
Your principal is guaranteed. MYGAs are very safe.
Tax-deferral. You pay no income taxes on your MYGA until it is withdrawn. This can be beneficial if you are in a high tax bracket now, and want to delay withdrawals until you are in a lower tax bracket in retirement.
You can continue the tax deferral at the end of the term with a 1035 exchange to another annuity or insurance product. This is a tax-free rollover.
Creditor protection. As an insurance product, a MYGA offers asset protection.

Lock in Today’s Rates

Interest Rates have risen a lot over the last two years as the Federal Reserve has increased rates to fight inflation. As a result, the rates on MYGAs are the best they have been in over a decade, over 5% today. The expectation on Wall Street is that the Fed will begin cutting interest rates sometime this year as inflation is better under control.

Now appears to be a good time to lock-in today’s high interest rates with a MYGA. This is one of their big advantages over most bonds. Today’s bonds often are callable. This means that the issuer can redeem the bonds ahead of schedule. So, when we buy an 5-year Agency or Corporate bond with a yield of 5.5%, there’s no guarantee that we will actually get to keep the bond for the full five years. In fact, if interest rates drop (as expected), there will be a wave of calls, as issuers will be able to refinance their debt to lower interest rates.

We are already seeing quite a few Agency bonds getting called in the past month.

We don’t have this problem with a MYGA, they are not callable. The rate is guaranteed for the full duration. Given the choice of a 5.5% callable bond or a 5.5% MYGA, I would prefer the annuity given the possibility of lower rates ahead. The MYGA will lock-in today’s rates whereas the callable bond might be just temporary. If rates fall to 4%, the 5.5% bond gets called and then our only option is to buy a 4% bond.

Some bonds are not callable, most notably US Treasuries. However, the rates on MYGAs are about 1% higher than Treasuries today. If you are planning to hold to maturity, I would prefer a MYGA over a lower-yielding, non-callable bond.

The Fine Print

What are the downsides to a MYGA? The main one is that they are not liquid and there are steep surrender charges if you want your money back before the term is complete. Some will allow you to withdraw your annual interest or 10% a year. Other MYGAs do not allow any withdrawals without a penalty. Generally, the higher the yield, the more restrictions.

One way we can address the lack of liquidity is to “ladder” annuities. Instead of putting all the money into one duration, we spread the money out over different years. For example, instead of having $50,000 in one annuity that matures in five years, we have $10,000 in five annuities that mature in 1, 2, 3, 4, and 5 years. This way we will have access to some money each and every year.

Like a 401(k) or IRA, withdrawals from an annuity prior to age 59 1/2 will carry a 10% penalty for pre-mature distributions from the IRS. The penalty only applies to the earnings portion. Think of a MYGA as another type of retirement account.

Lastly, I do get paid a commission on the sale of the annuity from the insurance company. This does not come out of your principal – if you invest $10,000, all $10,000 is invested and growing. And I do not charge an investment management fee on a MYGA, unlike a bond. A 5% MYGA will net you 5%, whereas a 5% bond will net you 4% after fees. So in this case, I think the commission structure is actually preferable for investors.

Is a MYGA right for you?

Most of my MYGA buyers are in their 50s and older and have a lot of fixed income holdings already. They don’t need this money until after 59 1/2 and are okay with tying it up, in exchange for the guarantees and tax-deferral benefits. They have other sources of liquidity and a solid emergency fund. When we compare the pros and cons of a MYGA to a high-quality bond, for some the MYGA is a good choice. If you are not a current client, but are interested in just a MYGA, we can help you with no additional obligation. I am an independent agent and can compare the rates and features of MYGAs from different insurers.

Many investors have been wishing for a safe investment where they can just make 5% and not lose any money. That used to be readily available 20 years ago, but disappeared after 2009 when central banks took interest rates down to zero. Today 5% is back and we can lock it in for 3-10 years with a MYGA. You can’t get that in a 10-year Treasury. Other bonds and CDs with comparable rates are probably callable. If you want a safe, non-callable, guaranteed 5%+, a MYGA may be for you.

US and French Social Security

Posted On April 14, 2023 By Scott Stratton, CFP(R), CFA In Retirement Planning /

We are in Paris and several clients have reached out to make sure we are doing okay, given the demonstrations and riots regarding France’s retirement system. Yes, we are fine and actually never saw any of these events other than on the news. Day to day life in Paris is normal, and thankfully the garbage strike is over. It has been perfectly tranquil in our neighborhood and we are enjoying life in the city.

Why are the French upset? Currently, if you are 62 and have worked for 42 years, a French citizen can receive their full retirement benefit of 50% of the average salary of their highest paid 20 years of work. If you don’t have 42 years of contributions, you will receive less than 50%, or you can work for longer to increase your benefit up to 50%. So, if you had been making $60,000 (Euros actually), you could potentially retire at 62 with a $30,000 pension. Under the new rules, the full retirement benefit will not become available until age 64 with 43 years of work. There are some interesting parallels between US and French Social Security.

The French Connection

In a recent interview, France’s President Macron defended the changes, which have been enormously unpopular. Macron explained that the program has always been an entitlement program, where current benefits are paid by current taxes. It is not a personal savings or investment account. When Macron took office, there were 10 million retirees receiving benefits, out of France’s 67 million population. Today, there are 17 million retirees and that number will grow to 20 million by 2030. 20 million pensioners out of a total of 67 million people. There are 1.7 workers in France for each retiree.

1.7 workers cannot provide an average monthly benefit of 1300 Euros for each retiree. There are only two options, increase taxes or decrease benefits. France already has high taxes, 20% just for social programs (this also includes health insurance, unemployment, maternity benefits, and other programs). 14% of France’s GDP is just retirement pensions. France compared their program and expenditures to similar countries and recognized that their retirement age was too low, given how much longer people are living today.

Macron tried to work with representatives in their Parliament on a solution. But when no agreement could be reached, he issued an executive order to make the changes without a vote. He noted that he had to do what was in the country’s best interest in the long term and preserve the program for their children and grandchildren, even if it was not the most popular thing to do. I was impressed by his directness, intelligent explanation of a complex problem, and courage to do the right thing even when it is not easy or popular.

The US Conundrum

I’ve been writing about the problems facing US Social Security since 2008. Back then, the 2036 projected collapse of the Social Security Trust Fund seemed like a lifetime away. Today, Social Security projects that the Trust Fund will be depleted by 2033. At that time, taxes will only cover about 70% of promised benefits. And every year, the Social Security Trustees report tells us how much we need to increase taxes or decrease benefits to keep the program solvent for 75 years.

Unfortunately, over the last 15 years no changes have occurred. It has been political suicide for any politician to suggest reforming Social Security. The easiest attack ad has always been to say that your opponent wants to “take away your Social Security check”. So we keep on marching towards that cliff with no change in direction. Shame on our politicians for not being willing to save the foundation of our retirement.

When Social Security started, there were 16 workers for every retiree and the average life expectancy was 65. Today, there are 2.8 workers for every retiree and that ratio continues to shrink. The typical 65 year old, in 2023, will live for at least 20 years. Like in France, it doesn’t matter what “you paid into Social Security”. That’s not how the program ever worked. Current taxes pay current beneficiaries. Your past contributions were spent on your parent’s or grandparent’s check.

No Easy Solution

Compared to France, the US demographics may look better. However, France actually is running a smaller deficit on their retirement program – only a 10 Billion Euro average annual shortfall for the next decade. They actually ran a surplus in 2022 and are proactively making these changes looking forward to the decade ahead. They’re making changes before there is a deficit! (Social Security spent only $56 Billion of the Trust Fund last year, but this will accelerate and deplete the whole $2.8 Trillion over the next 10 years.)

For the US, if we we wait, it will magnify the size of the changes needed. It would be better to start today to save Social Security. We can either increase taxes or reduce benefits. Those are the only two options. No one wants to do either, so we have to reach a compromise.

Thankfully, there are actuaries at Social Security who study all proposals. Their annual report estimates how much of the shortfall could be reduced for each change. Here are some of their calculations, looking at the improvement of the long-range actuarial balance. (We should be looking for some combination which equals at least 100%.)

Impact of Possible Changes to US Social Security

Reduce COLAs by 1% annually: 56%
Change COLA to chained CPI-W: 18%
Calculate new benefits using inflation rather than SSA Average Wage Index: 80%
Reduce benefits for new retirees by 5% starting 2023: 18%
Wage test. Reduce SS benefits from 0-50% if income is $60k-180k single/$120k-360k married: 15%
Increase Full Retirement Age from 67 to 69 by 2034, and then increase FRA by 1 month every 2 years going forward: 38%
Increase the Payroll Tax from 12.4% to 16% in 2023: 103%
Eliminate SS cap and tax all wages: 58%
Eliminate SS cap, tax all wages, but do not increase benefits above the current law maximum: 75%
New 6.2% tax on investment income, for single $200k / married $250k: 29%

I don’t have an answer for what Washington will do. But we can look at what will actually work. And what is perhaps even more interesting is what doesn’t work. It is shocking, for example, that wage testing SS only improves the shortfall by 18%. Or that Reducing COLAs by 1% every year only will cover half the shortfall. Unfortunately, we may need to increase taxes. Moving to 16% payroll tax would fully cover the shortfall. That would be a relatively small increase from 6.2% to 8%, each, for an employee and the employer. But that is a regressive tax, which would impact low earners more than high earners. For reforms to work, it might require a combination of both increased taxes and reductions in the way benefits increase.

Kicking The Can Down The Road

Will the US take action to save Social Security, or will the reaction in France scare US Politicians? It’s hard to imagine our divided Congress reaching a compromise on an issue as difficult and controversial as changing Social Security. But any politician who is still talking about the other side as “trying to take away your Social Security” is now part of the problem and not part of the solution. Kicking the can down the road is not going to help America.

What is certain is the need to save Social Security. It is the largest source of retirement income for most Americans. And the lower your income, the more Social Security is needed to cover retirement expenses. We can’t keep ignoring the future of Social Security, it’s not going to get better on its own. The status quo is not an option.

I hope the US won’t see the same riots as Paris. But I also hope US politicians will do their job and have the courage to make the tough choices that are in the best interest of the public. US and French Social Security are both in the same precarious state. Let’s hope Winston Churchill was right: “You can always count on Americans to do the right thing, after they have exhausted all other possibilities.” That day is coming soon.

Secure Act 2.0 Retirement Changes

Posted On December 29, 2022 By Scott Stratton, CFP(R), CFA In Retirement Planning /

The SECURE Act 2.0 passed this week after being discussed in Washington for nearly two years. The Act could not make it through Congress on its own, but it was stuffed into the Omnibus Spending Bill that was required to avoid an imminent government shutdown. I’ll save that rant for another day and focus on some of the dozens and dozens of changes to retirement planning in the Secure Act 2.0 which will affect you.

First, some background: The original SECURE Act was passed in December 2019. This legislation was the largest change to retirement planning in recent decades. It included increasing the age of RMDs from 70 to 72 and eliminating the Stretch IRA for beneficiaries.

The SECURE Act 2.0 goes even further and has a large number of changes to help improve retirement readiness for Americans. We are not going to cover all of these changes, but focus on a few key areas that are likely to apply to my clients.

Required Minimum Distributions

The SECURE Act 2.0 will gradually increase the age of RMDs from 72 to 75. Next year, the age to start RMDs will be 73, and then this will increase to age 75 in 2033. So, if you were born before 1950, your RMD age will remain 72 and you have already started RMDs. If you were born between 1951-1959, your RMD age is 73. And if you were born in 1960 or later, RMDs will begin in the year you turn 75.

I’m happy to see RMDs pushed out further to allow people to grow their IRAs for longer. For investors, this will extend the window of years when it makes most sense to do Roth Conversions. People are living longer and we should be pushing out the age of RMDs and starting retirement.

Roth Changes

Washington loves Roth IRAs. Anyone who thinks Washington doesn’t like Roths should consider the incredible expansion to Roths in SECURE Act 2.0. Roths are here to stay.

First, SEP IRAs and SIMPLE IRA plans will be amended to include Roth Accounts. This brings them up to par with 401(k) plans which have offered a Roth option for several years now. What does this mean? Roth contributions are after-tax and grow tax-free for retirement. You will be able to now open a Roth SEP or a Roth SIMPLE. Do you have a W-2 job and also self-employment income? You can do a 401(k) at work and also a Roth SEP for your self-employment.

2.0 also eliminates the RMD requirement from Roth 401(k)s. This was an odd requirement, and could easily be avoided by rolling a Roth 401(k) to a Roth IRA. But it still caught some people by surprise, so I am glad they eliminated this.

Starting in 2023, Employers may now make matching contributions into Roth 401(k) sub-accounts for employees. These additional contributions will be added to the employee’s taxable income. So, this may not make sense for everyone.

Forced Roth for Catch-Up Contributions

In 2024, high wage earners will be forced into using a Roth sub-account for catch-up contributions. If you are over age 50, you can make catch-up contributions. If you made over $145,000 in the previous year, your catch-up contributions must go into a Roth 401(k) starting in 2024. You will no longer be able to make Traditional (“deductible”) contributions with catch-up amounts. Oh, and if your company does not currently offer a Roth option, everyone over 50 will be prohibited from making any catch-up contributions.

This one will be a mess and is one of the only negative impacts we will see from SECURE Act 2.0. It will take many months for 401(k) providers and employers to update their systems and figure out how to implement these new changes.

Lots of Roth changes, but what isn’t here? The SECURE Act 2.0 didn’t eliminate the Backdoor Roth IRA. Many in Congress have been wanting to kill the Backdoor Roth, but it lives on. There are no new restrictions on Roth Conversions of any sort. Why so much love for Roths? Washington wants your tax money now, not in 30 years.

529 Plan to Roth

What if you fund a 529 College Savings plan for your child and they don’t use all the money? Currently, you can change the 529 plan to another beneficiary. But if you don’t have another beneficiary, withdrawing the money could result in taxable gains and a 10% penalty. The SECURE Act 2.0 is creating a third option: you can rollover $35,000 from a 529 plan to a Roth IRA for the beneficiary.

Here are the requirements. You must have had the 529 plan open for at least 15 years. You cannot rollover any contributions made in the preceding five years. Each year, the amount rolled from the 529 to the Roth is included towards the annual Roth contribution limit. For example, this year the limit is $6,500. The maximum you could roll from a 529 would be $6,500. But if the beneficiary already contributed $3,000 to an IRA (Roth or Traditional), you could only roll $3,500 from the 529 to the Roth. Thankfully, there are no income limitations to make this rollover. The lifetime limit on rolling over a 529 to a Roth will be $35,000, so this may take 5-6 years assuming the beneficiary makes no other IRA contributions.

You can change the beneficiary of a 529 plan to yourself. So, could you take an old 529, change the beneficiary to yourself and then roll it into your own Roth IRA? It is unclear in the legislation if a change in beneficiary will start a new 15-year waiting period. We will have to wait for additional rules to find out.

Other SECURE Act 2.0 Retirement Changes

So many changes! (Here is the most detailed summary I have seen so far.) These won’t impact everyone but I am studying all of these to see who might benefit:

IRA catch-up amounts will be indexed to inflation and increase in $100 increments.
401(k) Catch-up contributions will be increased for ages 60-63. The amount will be $10,000 or 150% of the annual amount, whichever is higher.
QCD (Qualified Charitable Distributions) limit of $100,000 will be indexed to inflation.
New exceptions to the 10% premature distribution penalty.
Emergency Savings Accounts, allowing people to access their 401(k)s without penalty. (Bad idea, but so many people in distress do this and then have to pay penalties and taxes, hurting them even further.)
QLAC limit increased to $200,000.
Allowing matching 401(k) contributions for payments towards student loans.
Tax credits for small employers who start a retirement plan.
New Starter 401(k) plans.
Lower penalties for missed RMDs.

I appreciate that Washington wants to make it easier for Americans to save for retirement. The SECURE Act 2.0 has a vast amount of retirement changes to incentivize the behavior the government wants to see. For those who are able to save for retirement, they are making it easier to save and accumulate assets. Your retirement is your responsibility! And retirement planning is my job. I’m here to help with your questions, preparation, and implementing your retirement goals.

How to Reduce IRMAA

Posted On January 18, 2022 By Scott Stratton, CFP(R), CFA In Retirement Planning /

Many retirees want to find ways to avoid or reduce IRMAA. Why do retirees hate Irma? No, not a person, IRMAA is Income Related Monthly Adjustment Amount. That means that your Medicare Part B and D premiums are increased because of your income. We are going to show how IRMAA is calculated and then share ways you can reduce IRMAA.

Medicare Part A is generally free at age 65, and most people enroll immediately. Part A provides hospital insurance for inpatient care. Part B is medical insurance for outpatient care, doctor visits, check ups, lab work, etc. And Part D is for prescription drugs. When you enroll in Parts B and D, you are required to pay a monthly premium. How much? Well, it depends on IRMAA.

IRMAA Levels for 2022

IRMAA increases your Medicare Part B and D premiums based on your income. There is a two year lag, so your 2022 Medicare premiums are based on your 2020 income tax return. Here are the 2022 premiums, based on your Modified Adjusted Gross Income, or MAGI.

2020 Single MAGI

$91,000 or less

$91,001 to $114,000

$114,001 to $142,000

$142,001 to $170,000

$170,001 to $500,000

$500,001 and higher

2020 Married/Joint MAGI

$182,000 or less

$182,001 to $228,000

$228,001 to $284,000

$284,001 to $340,000

$340,001 to $750,000

$750,001 and higher

2022 Monthly Part B / Part D

$170.10 / Plan Premium (PP)

$238.10 / PP + $12.40

$340.20 / PP + $32.10

$442.30 / PP + $51.70

$544.30 / PP + $71.30

$578.30 / PP + $77.90

How to Calculate MAGI

I have written previously about how the IRS uses a figure called Modified Adjusted Gross Income or MAGI. MAGI is not the same as AGI and does not appear anywhere on your tax return. Even more maddening, there is no one definition of MAGI. Are you calculating MAGI for IRA Eligibility, the Premium Tax Credit, or for Medicare? All three use different calculations and can vary. It’s crazy, but our government seems to like making things complex. So, here is the MAGI calculation for Medicare:

MAGI starts with the Adjusted Gross Income on your tax return. For Medicare IRMAA, you then need to add back four items, which you may or may not have:

Tax-exempt interest from municipal bonds
Interest from US Savings Bonds used for higher education expenses
Income earned abroad which was excluded from AGI
Income from US territories (Puerto Rico, Guam, etc.) which was non-taxable

Add back those items to your AGI and the new number is your MAGI for Medicare.

Why Retirees Hate IRMAA

The IRMAA levels are a “Cliff” tax. Make one dollar over these levels and your premiums jump up. Many retirees plan on a comfortable retirement and find out that their Social Security benefits are much less than they expected because of Medicare Premiums. For a married couple, if your MAGI increases from $182,000 to $228,001, you will see your premiums double. And while young people think it must be so nice to get “free” health insurance for retirees, this couple is actually paying $8,164.80 just for their Part B Premiums every year! And then there are still deductibles, co-pays, prescriptions, etc.

Sure, $228,001 in income sounds a lot for a retiree, right? Well, that amount includes pensions, 85% of Social Security, Required Minimum Distributions, capital gains from houses or stocks, interest, etc. There are a lot of retirees who do get hit with IRMAA. And this is after having paid 2.9% of every single paycheck for Medicare over your entire working career. That’s why many want to understand how to reduce IRMAA.

10 Ways to Reduce MAGI for IRMAA

The key to reducing IRMAA is to understand the income thresholds and then carefully plan out your MAGI. Here is what you need to know.

Watch your IRA/401(k) distributions. Avoid taking a large distribution in one year. It’s better to smooth out distributions or just take RMDs.
Good news, Roth distributions are non-taxable. IRMAA is another reason that pre-retirees should be building up their Roth accounts. And there are no RMDs on Roth IRAs.
Be careful of Roth Conversions. Conversions are included in MAGI and could trigger IRMAA.
If you are still working, keep contributing to a Traditional IRA or 401(k) to reduce MAGI. If you are self-employed, consider a SEP or Individual 401(k). The age limit on Traditional IRAs has been eliminated.
Itemized Deductions do NOT lower AGI. While State and Local Taxes, Mortgage Interest, Charitable Donations, and Medical Expenses could lower taxable income, they will not help with MAGI for IRMAA.
However, if you are 70 1/2, Qualified Charitable Distributions (QCDs) do reduce MAGI. If you are younger than 70 1/2, donating appreciated securities can avoid capital gains.
Avoid large capital gains from sales in any one year. Be sure to harvest losses annually in taxable accounts to reduce capital gains. Use ETFs rather than mutual funds in taxable accounts for better tax efficiency. Place income-generating investments such as bonds into tax-deferred accounts rather than taxable accounts. Consider non-qualified annuities to defer income.
If you still have a high income at age 65, consider delaying Social Security benefits until age 70.
Once you are 65, you cannot contribute to a Health Savings Account (HSA). However, you may be able to contribute to an FSA (Flexible Spending Account), if your employer offers one. The maximum contribution for 2022 is $2,850 and you may be able to rollover $570 in unused funds to the next year.
Avoid Married filing separately. File jointly.

Life-Changing Event

Medicare does recognize that situations change and your income from two years ago may not represent your current financial situation. Under specific circumstances, you can request IRMAA be reduced or waived if you have a drop in income. This is filed using form SSA-44, as a “Life Changing Event”. Reasons for the request include:

Marriage, Divorce, or Death of a Spouse
You stopped working or reduced your hours
You lost income-producing property due to a disaster
An employer pension planned stopped or was reduced
You received an employer settlement due to bankruptcy or closure

Outside of the “Life-Changing Event” process, you can also appeal IRMAA within 60 days if there was an error in the calculation. For example, if you filed an amended tax return, and Social Security did not use the most recent return, that would be grounds for an appeal.

A few other tips: If you are subject to IRMAA and have Part D, Prescription Drug, coverage, consider Part C. Medicare Part C is Medicare Advantage. Many Part C plans include prescription drug coverage, so you will not need Part D. And there is no IRMAA for Part C. Lastly, while you can delay Part B if you work past 65, be sure to sign up immediately when you become eligible to avoid penalties.

IRMAA catches a lot of retirees, even though they don’t have any wages or traditional “income”. Between RMDs, capital gains, and other retirement income, it’s common for retirees to end up paying extra for their Medicare premiums. If you want to learn how to reduce IRMAA, talk with your financial advisor and analyze your individual situation. I’m here to help with these types of questions and planning for clients.

Stretch IRA Rules

Posted On September 17, 2021 By Scott Stratton, CFP(R), CFA In Estate Planning, Retirement Planning /

What are the Stretch IRA Rules? The SECURE Act changed the Stretch IRA rules as of January 1, 2020. While this was a proposal, I wrote 7 Strategies If The Stretch IRA Is Eliminated, which continues to get read numerous times every month. Today, we are going to dive into the new rules for IRA Beneficiaries. This is important because if you are leaving a large retirement account to your heirs, there could be a large tax bill! And if you don’t know these rules, you could make it even worse.

First, old Stretch IRAs are unchanged and are grandfathered under the old rules. So, for anyone who passed away by December 31, 2019, their beneficiaries could still inherit the account into a Stretch IRA. That means that they only have to take Required Minimum Distributions each year. They can leave the money invested in a tax-deferred account. For many of my clients with inherited IRAs, their Stretch IRAs have grown even though they are taking annual withdrawals!

Under the new rules, there are three classes of IRA Beneficiaries. First, there are Eligible Designated Beneficiaries (EDBs) who will still be able to use the Stretch IRA Rules. Second, there are non-Eligible Designated Beneficiaries (non-EDBs), who are now going to have to withdraw all the money within 10 years. This is called the “10 Year Rule”. Third, there could be a Non-Designated Beneficiary.

Eligible Designated Beneficiaries

There are six situations where an IRA Beneficiary today could use the old Stretch IRA rules.

A Spouse
Minor Children (see below)
Disabled Persons
Chronically Ill Individuals
Persons Not more than 10 years younger than the IRA owner
Certain See-Through Trusts

These individuals could inherit an IRA and use the old Stretch IRA rules. For example, if you left money to your sister who is 8 years younger than you, she could do a Stretch. Or to a friend who was disabled. The old rules and benefits will still apply in these cases!

Spouses and Children

Minor Children are not given an unlimited Stretch IRA, unlike in the past. Today, Minor Children can stretch the IRA until the age of majority, 18 or 21, depending on the state. If they are a full-time college student they can stretch until age 26. When they reach that age, then the 10 Year Rule kicks in and they must withdraw the remainder of the IRA within 10 years.

Spousal beneficiaries have a choice in how they treat the inherited IRA. They can roll it into their own IRA and treat it as their own. This is helpful if they are younger than the decedent and want to have smaller RMDs. However, if they are younger than 59 1/2, they might prefer to put it into a Stretch IRA. That way they can take withdrawals now and avoid the 10% pre-mature distribution penalty. If a surviving spouse is older than the decedent, they could use the Stretch IRA so they can put off RMDs until the decedent would have been 72.

Non-Eligible Designated Beneficiaries

Any person who is not one of the six EDBs is a non-Eligible Designated Beneficiary. Non-EDBs are must withdraw their entire IRA within 10 years. This would include adult children, grandchildren, or any other relative or friend who is more than 10 years younger than the IRA owner. Most non-spouse beneficiaries will be non-EDBs.

The IRS created some confusion this year as to what the 10 Year Rule Means. One document suggested that beneficiaries would still be required to take out some of the inherited IRA annually. That turns out not to be the case, as the IRS clarified in publication 590-B, Distributions from IRAs. Under the 10 year rule, there is no RMD or annual requirement. Beneficiaries have complete choice in when they withdraw from the IRA. The only requirement is that the whole account is withdrawn in 10 years.

For most beneficiaries, you will still want to draw down a large account gradually. Taking small withdrawals each year is likely to result in lower taxes than if you wait until the 10th year. For example, it would be better to take $100,000 a year for 10 years than $1 million all at once. This does give us some room for customization. If you have a low earning year, that could be a better year to take out a larger amount. If your tax rate will go up in 2022 or 2026, you might want to accelerate withdrawals while under a lower rate.

Non-Designated Beneficiaries

The third category is Non-Designated Beneficiaries. An NDB could occur if you don’t name a beneficiary, if you name your Estate as the beneficiary, or a charity or certain trusts. NDBs have the worst outcome, the old 5-year Rule. NDBs must withdraw the entire IRA within 5 years. Many people who established Trusts prior to 2020 named their trusts as the beneficiary of their retirement accounts. This will backfire now because the Trust cannot Stretch the distributions. And with Trust tax rates higher than for individual beneficiaries, this could hurt your beneficiaries quite a bit. If you have a Trust from before 2020, it should be revisited.

It is important that we review your beneficiaries from time to time to make sure they are up to date. It is also a good idea to have contingent beneficiaries in case your primary beneficiary pre-deceases you. IRAs do not have to go through probate. But if there are no beneficiaries, then this money could be tied up from months to more than a year as the Probate Court decides how to distribute your money.

Roth IRA Stretch Rules

Roth IRAs are inherited tax-free. So, on day one, any beneficiary can withdraw the entire Roth IRA balance and owe zero taxes. However, there are some options available for Roth Beneficiaries, too. And these also changed under the SECURE Act.

First, for spouses. A spousal beneficiary of a Roth IRA could take a lump sum distribution. Or they could roll the inherited Roth into their own Roth. Third, they could roll the Roth into an Inherited Roth account. In an Inherited Roth, they have two options for distributions. They can take annual Required Minimum Distributions based on their own age. Or, they can use the 5-year rule and withdraw the entire amount in 5 years. For most spouses, rolling the inherited Roth into their own will be a good course of action.

Non spouse beneficiaries also have an option to continue tax-free growth of a Roth. For Roth owners who passed away before 2020, beneficiaries could have elected to take RMDs. Under the new rules (owners who passed away after January 1, 2020), Roth Beneficiaries can use the 10 year rule. They have up to 10 years to take money out of their inherited Roth IRA.

Other Considerations

An inherited IRA also has a beneficiary. What happens then? Let say Mom left her IRA to her son years ago. Son has a Stretch IRA. Son passes away and leaves the inherited IRA to his wife. What now? You don’t get to Stretch twice. So the wife, in this case, is going to be under the 10-Year Rule. This is called a Successor Beneficiary.

A second example: Mom passes away in 2020 and leaves her IRA to her son. Son is under the 10-Year Rule. Son passes away in 2025 and names his wife as Successor Beneficiary. Does she get to restart the 10-Year Rule? No, the old rule applies, and she must withdraw the full account by 2030.

If you have a Beneficiary IRA, and are over age 70 1/2, you can also do Qualified Charitable Distributions. Most people don’t realize that QCDs could count towards their RMDs from an inherited IRA, too.

While I often only have one or two clients who inherit an IRA each year, every IRA owner should understand what will happen when they pass away. That’s why I am writing this somewhat technical article on the new Stretch IRA rules. By planning ahead, we can determine the best course of action for your situation. It could involve leaving a your IRA to charity, to a spouse, to children, grandchildren, or a trust. It may make sense to convert your IRA to a Roth.

For many of my clients, their largest accounts are IRAs. And there is a significant tax liability attached to those IRAs, for the owners, spouses, and heirs. If we plan well, we can help reduce those taxes!

What Percentage Should You Save?

Posted On April 24, 2021 By Scott Stratton, CFP(R), CFA In Retirement Planning /

One of the key questions facing investors is “What percentage should you save of your income?” People like a quick rule of thumb, and so you will often hear “10%” as an answer. This is an easy round number, a mental shortcut, and feasible for most people. Unfortunately, it is also a sloppy, lazy, and inaccurate answer. 10% is better than nothing, but does 10% guarantee you will have a comfortable retirement?

I created a spreadsheet to show you two things. Firstly, how much you would accumulate over your working years. This is based on the years of saving, rate of return, and inflation (or how much your salary grows). Secondly, how much this portfolio could provide in retirement income and how much of your pre-retirement salary it would replace.

The fact is that there can be no one answer to the question of what percentage you should save. For example, are you starting at 25 or 45? In other words, are you saving for 40 years or 20 years? Are you earning 7% or 1%? When you change any of these inputs you will get a wildly different result.

10% from age 25

Let’s start with a base case of someone who gets a job at age 25. He or she contributes 10% of their salary to their 401(k) every year until retirement. They work for 40 years, until age 65, and then retire. Along the way, their income increases by 2.5% a year. Their 401(k) grows at 7%. All of these are assumptions, not guaranteed returns, but are possible, at least historically.

In Year 1, let’s say their salary is $50,000. At 10%, they save $5,000 into their 401(k) and have a $5,000 portfolio at the end of the year. In Year 2, we would then assume their salary has grown to $51,250. Their 401(k) grows and they contribute 10% of their new salary. Their 401(k) has $10,475 at the end of Year 2.

We continue this year by year through Year 40. At this point, their salary is $130,978, and they are still contributing 10%. At the end of the year, their 401(k) would be $1,365,488. That’s what you’d have if you save 10% of your 40 years of earnings and grow at 7% a year. Not bad! Certainly most people would feel great to have $1.3 million as their nest egg at age 65.

How much can you withdraw once you retire? 4% remains a safe answer, because you need to increase your withdrawals for inflation once you are in retirement. 4% of $1,365,488 is $54,619. How much of your salary will this replace? The answer is 41.7%. We can change the amount of your starting salary, but the answer will remain the same. With these factors (10% contributions, 2.5% wage growth, 7% rate of return, and 40 years), your portfolio would replace 41.7% of your final salary. That’s it! That could be a big cut in your lifestyle.

What percentage should you replace?

41.7% sounds like a really low number, but you don’t necessarily have to replace 100% of your pre-retirement income. To get a more accurate number of what you need, we would subtract the following savings:

You weren’t spending the 10% you saved each year to your 401(k)
7.65% saved on FICA taxes versus wage income
Some percentage saved on income taxes, depending on your pre- and post-retirement income.
Your Social Security Benefit and/or Pension Income
Have you paid off your mortgage, or have other expenses that will be eliminated in retirement?

Many people will only need 75% to 80% of their final salary in retirement income to maintain the same standard of living. If their Social Security benefit covers another 20%, then they would only need a replacement rate of 55% to 60% from their 401(k).

Time Value of Money

The biggest factor in compounding is time. In our original example of 40 years of accumulation, the final portfolio amount was $1,365,488. However, what if you only save for 30 years? Maybe you didn’t start investing until 35. Perhaps you want to retire at age 55 and not 65? Either way, at the 30 year mark, the portfolio would have grown to $666,122. By saving for another 10 years, your accumulation will more than double to $1.365 million.

Here’s a chart that is perhaps a more useful answer to the question of what percentage you should save. It depends on how many years you will save and what percentage of your income you want to replace.

Income Replacement	50%	60%	70%
in 40 Years	12.0%	14.4%	16.8%
in 35 Years	15.7%	18.8%	22.0%
in 30 Years	20.9%	25.1%	29.2%
in 25 Years	28.5%	34.2%	39.9%
in 20 Years	40.3%	48.4%	56.4%

How do you read this? If you want to replace 50% of your income in 40 years from now, starting at zero dollars, you need to save 12% of your income. Actually, this is pretty close to the 10% rule of thumb. But no one says “If you are starting at age 25 and are planning to save for the next 40 years, 10% is a good rule of thumb”. What if you are starting later? Or, what if you want to have your portfolio replace more than 50% of your income.

As you reduce the accumulation period, you need a higher contribution rate. For example, at the 50% replacement level, your required contribution increases from 12% to 15.7% to 20.9% as you go from 40 to 35 to 30 Years. And if you are planning to retire in 20 years and have not started, you would need to save 40.3%.

Similarly, if you want your portfolio to replace more than 50% of your income, the percent to contribute increases as you stretch to 60% or 70%. These figures are quite daunting, and admittedly unrealistic. But one thing that may help slightly will be a company match. If you contribute 10% and your company matches 4% of your salary, you are actually at 14%. Don’t forget to include that amount!

What can you do?

We’ve made some conservative assumptions and perhaps things will go even better than we calculated. For example, if you achieve an 8% return instead of 7%, these contribution requirements would be lower. Or if the inflation rate is lower than 2.5%. Or if you can withdraw more than 4% in retirement. All of those “levers” would move the contribution rate lower. Of course, this cuts both ways. The required contribution rate could be higher (even worse), if your return is less than 7%, inflation higher than 2.5%, or safe withdrawal rate less than 4%.

If you want to consider these factors in more detail, please read the following articles:

If you’d like to play around with the spreadsheet, drop me an email (scott@goodlifewealth.com) and I’ll send it to you, no charge. Then you can enter your own income and other inputs and see how it might work for you. While our example is based on someone who is starting from zero, hopefully, you are not! You can also change the portfolio starting value to today’s figures on the spreadsheet.

The key is this: Begin with the End in Mind. The question of What percentage should you save depends on how long you will accumulate and what percent of income you want to replace in retirement. Saving 10% is not a goal – it’s an input rather than an outcome. Having $1.3 million in 40 years or $2.4 million in 35 years is a tangible goal. Then we can calculate how much to save and what rate of return is necessary to achieve that goal. That’s the start of a real plan.

You don’t have to try to figure this out on your own. I can help. Here’s my calendar. You are invited to schedule a free 30 minute call to discuss your situation in more detail. After that, you can determine if you’d like to work with me as your financial advisor. Sometimes, it isn’t the right fit or the right time, and that’s fine too. I am still happy to chat, answer your questions, and share whatever value or information I can. But don’t use a Rule of Thumb, get an answer that is right for your personal situation.

Retirement Buckets

Posted On December 11, 2020 By Scott Stratton, CFP(R), CFA In Retirement Planning /

Our fifth and final installment of our series on retirement income will cover the strategy of five-year retirement buckets. It is a very simple approach: you maintain two buckets within your portfolio. Bucket 1 consists of cash and bonds sufficient for five years of income needs. Bucket 2 is a long-term growth portfolio (stocks).

We could start with up to a 5% withdrawal rate. Let’s consider an example. On a $1 million portfolio, we would place $250,000 in Bucket 1. That is enough to cover $50,000 in withdrawals for five years. Bucket 1 would be kept in cash and bonds, for safety and income. Each year, you would take withdrawals from Bucket 1.

Bucket 2, with $750,000, is your stock portfolio. The goal is to let this money grow so that it can refill Bucket 1 over time. In years when Bucket 2 is up, we can refill Bucket 1 and bring it back up to five years worth of money. At $750,000, a 6 2/3% annual return would provide the $50,000 a year needed to refill Bucket 1.

Addressing Market Volatility

When the market is flat or down, we do not take a withdrawal from Bucket 2. This addresses the big risk of retirement income, having to sell your stocks when they are down. Instead, by having five years of cash in Bucket 1, we can wait until the market recovers before having to sell stocks. That way, you are not selling stocks during a time like March of 2020, or March of 2009! Instead, we hold on and wait for better times to sell.

Historically, most Bear Markets are just for a year or two, and then the market begins to recover. Sometimes, like this year, the recovery is quite fast. The goal with our Retirement Buckets is to never have to sell during a down year. And while it is always possible that the stock market could be down five years in a row, that has never happened historically.

Retirement Buckets is different from our other withdrawal strategies, such as the 4% rule or the Guardrails strategy. Those strategies tend to have a fixed asset allocation and rebalance annually. The Retirement Buckets Strategy starts with a 75/25 allocation, but that allocation will change over time. Our goal is not to maintain exactly 25% in the cash/bonds bucket, but rather to target the fixed amount of $250,000. If the market is down for two years, we may spend Bucket 1 down to $150,000.

Stocks for Growth

For most people, having five years of cash and bonds in reserve should be sufficiently comfortable. However, if you wanted to increase this to 7 years, a 65/35 initial allocation, that would also work. But, I would suggest starting with at least a 60% allocation to stocks. That’s because when Bucket 2 is smaller, you need an even higher return to refill the $50,000 a year. If you started with 60/40 ($600,000 in Bucket 2), for example, you’d need a return of 8 1/3%.

Retirement Buckets can work because you are creating flexibility around when you are going to sell stocks. When you maintain any fixed allocation, you run into the problem of selling stocks when they are down. Rebalancing is good when you are in accumulation – it means you are buying stocks when they are low. But for retirement income strategies, selling stocks when they are down is likely going to be a bad idea.

Selling Bonds First

Somewhat related to a Buckets Strategy is another income strategy, the Rising Equity Glidepath. In this approach, you sell your bonds first. So, if you started with a 60/40 allocation at retirement and withdraw 4% a year, your bonds would last you 10 years (actually a little longer, with interest). If you avoid touching your stocks for 10 years, they are likely to have doubled in value, historically, with just a 7% annual return. I see the Rising Equity Glidepath as being related to the buckets strategy because both approaches focus on not selling stocks. This reduces the Sequence of Returns risk that market losses impact your initial retirement years.

However, most investors become more conservative as they age, so they aren’t going to like the Rising Equity Glidepath. If they retire at 65, that puts them on track to be at 100% equities at age 75. That’s not what most want. So, even though the strategy looks good in theory, it’s not going to make sense in practice.

What’s Your Plan?

The Retirement Buckets approach can provide a strategy that is logical and easily understood by investors. We maintain five years of cash and bonds, and can replenish the cash bucket when the market is up. This gives you a flexible process for how you are going to fund your retirement and respond to market volatility.

I hope you’ve enjoyed our series on retirement income approaches. It is so important to understand how to create sustainable withdrawals from your portfolio. Whether you are already retired or have many years to go, we are here to help you find the right strategy for you.