Summary
The account withdrawal order is crucial for determining how funds are withdrawn from a client's accounts.
This order, along with the total annual withdrawal amount, specifies the exact amount to be withdrawn from each account.
Timeline Planning offers flexible modeling to accommodate various withdrawal strategies.
Introduction
Choosing the right account withdrawal order can significantly impact the sustainability of a retirement plan, especially when considering tax implications. Timeline Planning provides a flexible modeling system that allows advisors and clients to customize their withdrawal strategies. This article will explore how to set up and understand the account withdrawal order in Timeline Planning.
How to Choose the Withdrawal Order
If you have multiple accounts, you can set the withdrawal order by navigating to "Settings/Plan Settings." Here, you can select the sequence in which you want to withdraw funds from your accounts. Timeline's modeling is flexible enough to allow for all possible combinations based on your preferences.
Case Study: John's Account Withdrawal Strategy
Example 1: Even Account Withdrawal Order
Let's assume John has £300,000 in liquid assets, with £100,000 in Account A and £200,000 in Account B. If John opts for an even account withdrawal order, the funds will be withdrawn proportionally from both accounts.
Account A: 33.33% (£100,000 / £300,000)
Account B: 66.67% (£200,000 / £300,000)
John plans to withdraw £150,000 in the first year. Therefore, £50,000 (33.33% of £150,000) will be withdrawn from Account A, and £100,000 (66.67% of £150,000) will be withdrawn from Account B.
Example 2: Bespoke Account Withdrawal Order
In this scenario, John wants to withdraw from Account A first and then from Account B. Since Account A has £100,000, he will withdraw this entire amount from Account A and take the remaining £50,000 from Account B.
If Account A was an investment portfolio that experienced negative returns in the first year, John might not be able to withdraw the full £100,000. For instance, if the account value dropped to £94,900, John would need to withdraw the remaining £55,100 from Account B.
Conclusions
The account withdrawal order is a significant factor in retirement planning, particularly due to its tax implications. Timeline's efficient tax modeling and flexible account withdrawal order options allow for the construction of the most tax-efficient strategy for your clients. By understanding how to set up and utilize this feature, advisors and clients can make more informed decisions for a sustainable retirement plan.