In retirement, taxation will likely be your greatest on-going expense. Retirement however can also provide you with significant opportunities to reduce taxes. Taking advantage of these opportunities requires a shift in your thinking.

A Required Shift in Thinking

Effective retirement tax planning starts with the acknowledgment that annual cash flow needs will continuously fluctuate - both up and down. The magnitude of these fluctuations can be both big and small. Failure to acknowledge that spending peaks and valleys exist can cause taxes (rates and dollars paid) to fluctuate wildly. Conversely recognition of the variable spending patterns allows you to more strategically plan your withdrawals so that your taxes vary little from year to year and the overall average rate of tax you pay is less.

Why Opportunities are missed

As a generalization, I have found that most retirees base their choices of how to fund their retirement upon a static recurring after tax spending level (say $60,000 per year). The illusion that future spending levels will remain in a tight range of previous years is false and when it spikes up (to pay for a new roof, new car, big vacation etc.) those additional expense incur even high costs as funds are taken from accounts that drive taxes way up.

If you want to avoid paying more taxes than you ought to in retirement you need to:

  1. Acknowledge that your spending will vary from year to year
  2. Make an estimate of how future cash needs will change over time
  3. Use your estimates to create a withdrawal strategy that looks forward across all the years of life you have ahead of you.

Estimating Your Future Cash Needs

Estimating you how your spending will change in the future requires you to spend some time reflecting on what you would like to do, when you would like to do it, and how much you anticipate spending, when they you around to doing it. The financial rewards in tax savings make well worth your time and effort and there are a variety of powerful on-line tools that help make the process quick and easy. If you are interested in the program we use at Retirement Navigator to accomplish this task – please send me an email and I will tell you where to find it and give you some tips that will speed you along.

Describing what you think the future will look like is easier than it sounds and is the first step in building a retirement plan that minimizes your lifetime tax bill. Like the picture on the box of a jigsaw puzzle, this information provides the clues of how to connect the many pieces of the retirement income puzzle.

The greatest tax benefits will be received by those who have a strong grasp of not only the frequency, but also the magnitude of the peaks and valleys of their future spending.

Take Away Message

When you embrace the ebbs and flows of annual retirement spending and incorporate these projections into your retirement plan the tax savings can quickly become significant.


Doug Dahmer

17 July 2019