Spending in Your Retirement. A secure retirement is the combination of careful planning and understanding how taxes will affect you.
Diversify Beyond Tax Deferral...Let's be clear - 401k and IRA accounts are valuable tools. A word of caution however - don't forget to stash additional savings in taxable brokerage accounts, Roth IRAs, and/or max-funded life insurance accounts where possible. Why? Tax diversification. When you start drawing down your accounts, you will be paying tax on each dollar you take if all of your money is in tax deferred accounts. By utilizing additional accounts that are not simply deferred vehicles, you will have the ability to draw monies from a tax-free position thus keeping your tax rate lower.
Turning Accounts into Income:
Now that you've saved successfully, how do you draw income from your accounts? Many planners (myself included) recommend the following "order of draw:"
1. Taxable & tax-free assets first.
2. IRA & Roth accounts secondary.
3. Tax qualified plans (e.g. a 401k) last.
Keeping to this order will ensure that most of your tax-advantaged assets will stay in a position of growth as long as possible. One-time or large purchases should always be made by using withdrawals from taxable accounts where possible. This ensures you will not be adding to your marginal tax burden.
Don't Over-Commit to Home Equity.
Americans often make the mistake of over-committing funds to their home. This is an inefficient use of savings because home equity has 0% return on capital. (Don't confuse the value of your home with the equity in your home!) By accelerating your home payoff, you are costing yourself (potentially) tens or even hundreds of thousands of dollars of additional retirement savings you could have enjoyed later. Take those dollars you were going to use for a mortgage payoff and make additional deposits into a taxable brokerage account or Roth IRA if you are able.