A Retirement Head Scratcher: Spend Down to Save

Waiting to tap your retirement accounts can raise your tax bill.

Waiting too long to withdraw from your retirement savings can ultimately prove costly. (Adobe Stock)

I’ve been writing about retirement for nearly 15 years. It takes a lot to surprise me. Vanguard recently succeeded with the stat that nearly 80% of retirees ages 60 to 72 with balances of more than $100,000 hadn’t touched their retirement accounts. What? How are they making ends meet?

For the most part, these are not wealthy folks living off dividends from taxable brokerage accounts. They are middle or upper middle-class retirees clinging to their savings like a life raft and using Social Security to tide them over until required minimum distributions (RMDs) kick in at age 73.

RMDs are Uncle Sam’s way of collecting his share of savings that’s grown tax-deferred for decades. Starting at 73, retirees must withdraw a certain amount from their retirement accounts and pay income taxes on it. The tax code sets the minimum—you can always start withdrawing more at a younger age. That’s usually the better move.

Waiting to tap your account until the taxman comes knocking will leave you with bigger RMDs than if you began taking regular withdrawals in your 60s. Bigger RMDs boost your income for the year, increasing your tax bill and possibly even pushing you into a higher tax bracket. They could also raise your Medicare premiums two years down the line. This income-adjusted surcharge takes many retirees by surprise; it has a two-year lag, so your income in 2024 is what affects your 2026 premiums.

Tapping your account earlier can help you reduce your tax bill and get more from Social Security. You get a guaranteed 8% more for each year you wait from age 67 to 70. People worry about leaving Social Security money on the table if they happen to die young, but I’d be more worried about running out of money when you’re 85 or 90, and unable to go back to work.

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