A Stages Model for Planning Retirement Income Distribution

Everett, Michael D.; Anthony, Murray S.
June 2003
Journal of Financial Planning;Jun2003, Vol. 16 Issue 6, p42
Academic Journal
This article focuses on a stages model that can help financial planners in the U.S. deal with issues on retirement income distribution. The three basic tax rule categories for retirement funds are totally tax-deferred funds, partially tax-deferred funds, and after-tax funds. The three basic stages of retirement for planning distributions of income from retirement assets include early retirement, middle retirement and late retirement. Using totally tax-deferred funds would incur taxes on the full amount of the distribution, which could incur marginal taxes of around 30 percent and average taxes of 20 percent for middle-income households. A drop in household income in middle and late retirement could keep taxes lower. Calculations based on the Scholes/Wolfson framework, which incorporates the tax impacts on investments, demonstrate small advantages to deferring taxes on retirement fund earnings for relatively short periods. The calculations also indicate only about a 10 percent advantage for deferring use of deductible pensions under the assumed 20 percent average tax rate. The liquidity, investment, and paperwork considerations may support the use of some tax-deferred funds in early retirement.


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