(UBS)
A common approach retirees take to funding retirement spending is to defer taxable income as long as possible. This strategy aims to maximize tax-advantaged growth and preserve tax-free assets for heirs. Unfortunately, deferring taxes tends to create "tax torpedoes" for later retirement years, forcing families into higher tax brackets and reducing after-tax growth potential.
To help solve the challenge of tax-efficiently funding retirement spending, CIO has created a “Spending Waterfall” framework. This approach aims to streamline the decision-making process of withdrawing from different account types, with the goal of smoothing taxable income throughout retirement and thus improving after-tax growth potential. Using the spending waterfall, retirees aim to fill up lower tax brackets during low-tax years and stay out of higher tax brackets in high-tax years.
The optimal withdrawal sequence will vary for each retiree depending on spending needs, tax bracket, and the mix of taxable, tax-deferred, and tax-exempt assets. Below is a guide for implementation.
