04 Aug 2025 The Other Half of Retirement Planning: a Framework for Spending
Most people diligently plan the saving side of retirement – building a nest egg big enough to cover the bills, enjoy life, and leave something for the next generation, all while keeping taxes in check. Far fewer map out how those savings will be spent once the paychecks stop, and this oversight can be costly.
Without a deliberate spending plan, you may trigger avoidable taxes, interrupt compounding interest, and erode the cushion that protects later-life needs: the very goals that drove decades of saving.
Although no single formula fits every circumstance, a handful of tax-aware cash-flow principles can turn decades of disciplined saving into a spending strategy that protects today’s needs and tomorrow’s legacy.
Principles for tax-wise retirement spending
Claiming and deploying guaranteed income
None of us can fully predict our life expectancy, but if health and family longevity suggest a normal or long life, delaying Social Security benefits can make a noticeable difference in your payments.
For anyone born in 1960 or later, each year of delay after the full retirement age of 67 (66 if born before 1960) adds 8% to the benefit, so the check tops out at 124% of its base value at age 70. If married and financially secure, having the higher earner wait to claim benefits can result in hundreds of dollars more per month once they start receiving Social Security.
Consider James (67) and Maria (65). James, the higher earner, has a primary insurance amount (full-retirement age benefit) of $3,000 at full retirement age. If he starts receiving benefits the month he turns 67, the couple locks in that $3,000. If instead he waits until 70, the monthly deposit rises to roughly $3,720. That extra $720 every month translates to roughly $173,000 over a 20-year retirement before accounting for cost-of-living adjustments. Meanwhile, Maria can decide whether to begin her own (smaller) benefit or a spousal benefit as cash-flow needs dictate, keeping the household funded while the larger check “marinates.”
Either way, once you start receiving Social Security, it’s wise to use that guaranteed income for necessities like housing, groceries, utilities, and Medicare premiums. Since Social Security is inflation-indexed and government-backed, it’s the only payment in most portfolios that remains stable when markets fall. Allowing it to underwrite must-pay bills means a bad market or a longer life than expected won’t threaten the grocery budget.
Keep in mind that the ideal claim date hinges on health status, survivor benefits, and cash-flow needs; delaying is advantageous for many but not all households.
When credible health issues shorten the expected horizon, it may make sense to claim Social Security benefits early. Otherwise, delaying the higher earner’s benefit and dedicating it to life’s fixed costs gives the household a higher, inflation-proof floor that no market correction can erode.
Spend money the IRS is taxing anyway
Dividends, interest, rental net cash flow, and mutual-fund distributions all hit your Form 1040 even if you reinvest them, but they don’t necessarily have the same effect.
Ordinary income streams, such as bond or CD interest, short-term fund distributions, and rental cash flow, are taxed at your regular tax bracket. They increase AGI and push you toward certain tax and surcharge thresholds, like:
IRMAA surcharges on Medicare Part B and D that kick in once MAGI tops $212,000 for joint filers.
Up to 85% of Social Security benefits become taxable when combined income exceeds $44,000 for joint filers. Note that combined income includes AGI, tax-exempt interest, and ½ of your annual Social Security benefits.
The 3.8% Net Investment Income Tax (NIIT) applies above $250,000 of MAGI for joint filers.
So, it’s wise to use these income streams for expenses that can create an offsetting deduction, like Medicare premiums, out-of-pocket health costs, property taxes, or charitable gifts. That can help keep the ordinary income tax hit as low as possible.
Qualified stock dividends and long-term capital-gain (LTCG) distributions are taxed at preferential rates. In 2025, a married couple pays 0% on LTCGs and qualified dividends until total taxable income reaches $96,700; the 15% rate starts just above that, and 20% above $600,050. After you know how much ordinary income is locked in, you can “top off” the 0% band by realizing optional LTCGs like selling a high-basis ETF, without owing federal tax. Plan your withdrawals so that your ordinary income, plus any voluntary gains, keeps you just below the next threshold.
For example, let’s say Karen and Michael are both 68 years old, have delayed their Social Security, and earn a modest part-time salary. They also receive $4,000 of bank interest and $12,000 of net rental income. They direct as much of the bank interest and rental proceeds as possible to property taxes and Medicare premiums. After deductions, their taxable ordinary income falls around $68,000, leaving some wiggle room (roughly $28,700) within the 0% LTCG bracket. They’re able to collect $18,000 in qualified dividends and can still cash in another $10,000 in LTCG assets without exceeding the $96,700 threshold. This gives them $28,000 to spend however they please without triggering a Medicare premium bump, NIIT, or LTCG taxes.
Manage Required Minimum Distributions (RMDs)
Many tax-deferred retirement accounts require you to withdraw minimum distributions once you reach a specific age. These RMDs are taxed as ordinary income.
SECURE 2.0 now starts most RMDs at age 73 and pushes the threshold to 75 for those turning 74 after 2032. While the rules are more favorable than they once were, a missed RMD could still trigger a 25% penalty unless it is timely corrected or qualifies for a waiver.
While RMDs can’t be skipped, they can be redirected. The charitably inclined can redirect up to $108,000 (indexed annually) from an IRA directly to a qualified charity; the Qualified Charitable Distribution (QCD) removes that amount from taxable income while satisfying the RMD requirement.
Position assets (and gifts) to minimize taxes
Once today’s unavoidable income is mapped, the next step is reducing tomorrow’s by choosing the right account for every asset, and, if you give to charity, the right asset for every gift.
Interest-heavy holdings, such as Treasuries, corporate bonds, CDs, and REIT funds, can affect ordinary income unless they’re tucked inside an IRA or other tax-deferred account. If possible, defer those withdrawals until you’re in a lower tax bracket.
On the other hand, broad-market or growth ETFs that issue less qualified dividends tend to be a better fit for taxable accounts, where their return shows up mainly as unrealized appreciation you control. When markets dip or space remains in the 0% capital-gains band, you can sell just enough of those ETFs to raise cash without owing federal tax.
Philanthropy can amplify tax savings. Instead of writing checks, you might transfer appreciated shares into a donor-advised fund. The maneuver erases the built-in capital gain, delivers a full fair-market-value deduction, and, when timed right, you can still collect any qualified dividends to use for discretionary goals. Note: once the shares are transferred, future dividends flow to the charity. If you want to retain an upcoming payout, wait until the cash arrives or at least until the day after the stock’s record date before transferring the shares.
Draw principal with precision
When portfolio sales become necessary, start with the highest-basis taxable shares to minimize realized gains; in a year when you still have room in the 0% long-term capital gains band, harvesting some low-basis shares may be equally smart. Once taxable reserves are gone, dip into tax-deferred accounts, and, if cash flow allows, reserve Roth dollars for last. Roth IRAs face no RMDs and grow tax-free, making them an attractive late-life or generational-wealth asset.
Of course, no single withdrawal order fits every retiree. A written plan that’s re-evaluated annually can turn these guidelines into a sequence tailored to your specific circumstances.
Expect the unexpected
Even a flawless withdrawal map can unravel without a contingency plan. While we can’t plan for everything, here are a few critical risks to consider:
Healthcare: Medicare plans may still have deductibles, drug gaps, and coinsurance. A high-deductible supplement or a direct primary care membership may be layered to reduce out-of-pocket costs. Choosing the right mix early is crucial because underwriting hurdles become steeper after age 65.
Long-term care: Approximately 70% of Americans who reach 65 will require assistance with daily living, and just over 20% will need care for longer than five years. Deciding early whether to self-fund a liquid reserve or purchase traditional, hybrid, or annuity-based LTC coverage can spare you a costly scramble when premiums and underwriting hurdles peak.
Information: Store housing account log-ins, tax returns, deeds, titles, and important legal documents in a secure digital vault and agree on a trigger (say, two missed bills or a documented cognitive screening) for handing control to a trusted agent. These guardrails won’t stop every surprise, but they can keep one crisis from derailing the entire plan.
Controller-level oversight
The order in which retirees tap each account can extend portfolio life and reduce lifetime taxes. A professional advisor can help model RMD tax impact, quantify the benefits of delaying Social Security, keep track of taxable account cost basis, and even help with a year-by-year cash flow map. They can also identify tax-saving opportunities and any risks in your current planning.
The framework outlined here illustrates general tax and cash-flow principles. Optimal sequencing will depend on your specific circumstances. If you’re interested in creating a personalized financial framework to protect your lifestyle while preserving flexibility in retirement, please contact our office.
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