top of page

Rethinking Taxes and Retirement Risks

Diversify the taxability of your retirement and investment accounts.
Taxes and Retirement Risks

When contemplating your journey through life and achieving your goals and important milestones along the way, the initial considerations often gravitate towards saving and investing.​

We all know that starting early, prioritizing savings, and setting the allocation of your portfolio to manage risk and optimize returns form the fundamental pillars for many investors. With the progression of your income and the compounding growth of your investments, tax considerations gradually become more significant.

However, conventional investing perspectives often relegate taxes to a secondary role. Yet, there is compelling rationale for integrating tax considerations alongside intelligent investment strategies. Both are pivotal in helping to maximize after-tax income, representing distinct yet interconnected aspects of investing and growth. While investing facilitates income growth, tax planning helps with the preservation of attained growth.

In retirement, the significance of tax planning escalates as you no longer receive regular income. To achieve your desired retirement lifestyle, tax planning complements your investment strategy. While many investors incorporate some level of tax planning, such as implementing tax loss harvesting during portfolio rebalancing or converting a 401(k) to a Roth account to mitigate Required Minimum Distributions (RMDs) and gain more control over taxable income in retirement, these efforts often adopt a fragmented approach.

Adopting a more holistic approach to tax planning, drawing inspiration from two fundamental investing principles, can lead to superior outcomes. By conceptualizing taxes through the lenses of tax allocation and tax diversification, and integrating these considerations into your retirement strategy, you can better ensure the stability of your plan and mitigate the impact of taxes on retirement risks.

Rethinking Taxes and Retirement Risks

Previously, there was a widespread assumption that retirement taxes would be lower compared to one’s working years, primarily because retirees rely on investment income rather than a salary.

However, this notion might not hold true for individuals who have diligently saved in tax-advantaged accounts like a 401(k). Depending on the accumulated savings, required minimum distributions (RMDs) could result in substantial tax obligations. Additionally, other taxable income sources and the taxable portion of Social Security, which can reach up to 85%, contribute to potential tax burdens in retirement. Consequently, for many retirees, tax brackets in retirement may not significantly differ from those during their working years.

Therefore, planning a comprehensive retirement strategy that entails a thorough understanding of your income sources and their respective tax implications is imperative. This awareness of the tax burden directly influences your spending capabilities and the longevity of your retirement funds.​

Minimizing Tax Risk Through Diversification

When rethinking taxes and retirement risks, investors often approach it through the lens of investing principles. Much like evaluating downside risk and market volatility’s impact on retirement income, they scrutinize growth projections to gauge the sustainability of past performance and adjust investments accordingly. Asset allocation is key, emphasizing a diversified portfolio capable of weathering market fluctuations while maintaining a steady income stream.

From a tax standpoint, the focus shifts to understanding the tax implications on income and devising strategies to mitigate tax burdens. Similar to diversifying investments for income generation, diversifying tax situations helps in balancing tax liabilities. This involves incorporating investments with varying tax treatments, each offering specific tax advantages.

Tax-free accounts, like Roth accounts, accept after-tax contributions, with subsequent withdrawals being tax-exempt under certain conditions. Taxable accounts also involve after-tax contributions, but the generated income is typically subject to taxation. On the other hand, tax-deferred accounts are funded with pre-tax dollars, with distributions taxed as ordinary income upon withdrawal.

Crafting a strategy that aligns assets and investment tactics with appropriate tax treatments can minimize tax risk and foster a sustainable income stream throughout retirement.​

Tax Legislation Risk Requires Foresight and Planning

There’s the always present possibility of tax increases over time. Factors such as an aging population, necessary infrastructure investments, and ever-increasing government debt burdens. Tax revenue is the lifeblood of federal government spending commitments. While raising taxes on the ultra-wealthy often sparks political debate, there’s a growing concern that taxes may eventually rise for middle-class earners.

This presents a tax legislation risk, where government efforts to boost revenue could result in changes across various aspects of the tax landscape. This includes the expiration of existing tax cuts, closure of loopholes, and adjustments to individual income tax brackets. Furthermore, alterations to estate taxes and asset valuation methods might also come into play.

This risk isn’t contingent on any single political party’s control but is an ongoing reality requiring consideration in solid retirement planning. Neglecting to address potential tax changes could lead to unforeseen pitfalls and missed opportunities, as some tax-related opportunities often have narrow implementation timeframes.

Similar to assessing the overall return of a portfolio composed of various investments, the risk of tax increases stems from multiple factors. Viewing tax considerations through the same lens as investment returns or market expectations can help clarify thinking. Changes in taxation over time could significantly impact income, highlighting the importance of proactive planning to seize opportunities and mitigate risks.

The Bottom Line

Taxes, especially during retirement, represent a significant aspect of the risk landscape that necessitates careful planning. Implementing strategies to diversify your tax allocation can position you to mitigate tax liabilities across your entire financial journey. By proactively managing your tax exposure, you can optimize your financial outcomes and enhance the sustainability of your retirement plan.


The information contained herein is intended to be used for educational purposes only and is not exhaustive. Diversification and/or any strategy that may be discussed does not guarantee against investment losses but are intended to help manage risk and return. If applicable, historical discussions and/or opinions are not predictive of future events. The content is presented in good faith and has been drawn from sources believed to be reliable. The content is not intended to be legal, tax or financial advice. Please consult a legal, tax or financial professional for information specific to your individual situation.


bottom of page