For those of us who are beyond normal retirement age, whether we are actually retired or not, there are a lot of moving parts to manage when it comes to generating income from our retirement savings. During our working years, we must allocate our investment assets to build up our retirement funds so that we have enough money accumulated to provide us with a lifetime income. When we do retire, we then must shift our emphasis to ensuring that our money will last as long as we do. That means keeping our money invested and withdrawing the right amount of income each year from the proper account.

Most of us don’t believe that we will live as long as we, in all probability, will. According to actuarial mortality tables, a healthy 65-year-old man has a 33 percent chance and a healthy woman a 44 percent chance of living beyond 90. For a 65-year-old couple, there’s more than a 50 percent chance that at least one of them will live beyond 90. And studies have shown conclusively that daily exercise coupled with the proper diet and continued mental activity usually leads to long life. As a result, it will behoove us to carefully consider the rate at which we deplete our retirement savings to generate the income we need.

For those of us whose employers provided a defined benefit pension plan, our task is far easier, since our monthly income from that source is fixed (and may also provide an inflation factor), along with our Social Security income. We only need be concerned with our withdrawals from the remainder of our retirement assets.

For others of us who don’t have the luxury of a defined monthly income, according to the Financial Research Corp., a Boston research firm, a 65-year-old retiree who withdraws an inflation-adjusted $45,000 annually from a $1 million portfolio of stock and bond investments has a 25 percent chance of running out of money before age 92. But if the retiree gets the same annual income by investing $400,000 in an immediate annuity and withdrawing the rest from $600,000 invested in stocks and bonds, the chance of running out of money drops to 6 percent, the research firm says. All of these results are based on hypothetical rates of return in the non-annuity assets. There will be more on the use of annuities in next week’s column.

A spreadsheet example was helpful to me. I assumed a 65-year-old had $1 million in a regular IRA. His first-year withdrawal was $40,000, and that amount increased each year by an inflation factor of 3 percent. His retirement account earned precisely 4 percent each year. Under that scenario, he would run out of money at age 91; if the IRA earned a level 5 percent, the money would last under age 96. And remember that the withdrawal each year was taxable.

The income tax issue is a biggie, so it is important to time the withdrawal of funds based on the tax status of the underlying account. Assume that our retiree has money in a taxable account at a local stock brokerage firm and has a regular IRA, along with a Roth IRA. In this example, the proper withdrawal strategy would be to deplete the monies in the taxable account first, leaving the rest to accumulate income tax free for as long as possible. After the taxable pool of money has been exhausted, the regular IRA should be the next asset pool to withdraw from (remembering that Required Minimum Distributions must commence by age 70˝), followed by the Roth IRA.

Another consideration is the marginal tax bracket that the annual withdrawal will put you into each year. Your marginal tax bracket means that tax rate you would pay on your next dollar of income. For example, if your projected withdrawal from your regular IRA was going to thrust you into the 20 percent bracket based on the withdrawal amount, it would make tax sense to forego that full amount and remove the difference from your non-taxable Roth that year, keeping you in the 15 percent marginal tax bracket.

And you thought distribution planning was a snap ...

Got a financial planning question for Greg? Email him at Greg Roberts is a certified financial planner with 35 years of financial and estate planning experience.