How Smart Retirees Turn $1.2M Into Lifelong Income (and Lower Taxes)

Over the past two weeks, we've looked at how retirement expenses differ from working income and why the 4% rule isn't always the best guide. 

Today, let's focus on making the most of your retirement income sources while keeping your tax bill as low as possible.

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The Starting Point: Stable Income

When I help lawyers plan their exit from practice, I always start by identifying stable income sources they can count on. 

These reliable income streams form the foundation of your retirement plan and reduce the pressure on your investment portfolio.

These sources include pension plans, social security, and to a lesser extent practice installment sales and real estate income. Let’s dive into the one that trips retirees up the most—Social security.

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Getting the Most from Social Security

Social Security provides significant, inflation-protected income for most attorneys. How and when you claim these benefits makes a big difference in your lifetime income.

The difference between claiming at 62 versus waiting until 70 can add up to hundreds of thousands of dollars over your lifetime. For each year you delay claiming past your Full Retirement Age (66-67 for most attorneys near retirement), your benefit grows by 8%.

But here’s the kicker - delaying your social security means a higher withdrawal rate from your portfolio in the earlier years of retirement. This translates to less dollars growing over time for your benefit. 

So what’s the answer here? Hate to say it, but it’s nuanced and depends on your personal mix of assets, investment strategy, feelings around longevity risk, and your specific cashflows in retirement.

I try to refrain from the proverbial “It depends” answer, but sometimes I have to call it as it is.

Many lawyers I work with initially dismiss Social Security as small change compared to their portfolio. 

But a married couple with strong earnings histories might receive $50,000-$60,000 annually from Social Security. That's what a $1.2-$1.5 million portfolio might safely generate!

It pays to have a plan with Social Security.

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Making the Most of Your Practice Exit

How you structure your departure from practice significantly impacts your retirement security. Consider these options:

Complete Sale: Getting a lump sum provides immediate cash but creates a big tax hit all at once. Careful planning (Ideally 5+ years from sale) can help to position a significant portion of the sale to be taxed at capital gains rates, as opposed to ordinary income rates. 

Payment Plan Sale: Spreading payments over several years can lower your tax bill and provide steady income during early retirement, allowing your portfolio to grow untouched.

Of Counsel Role: Many attorneys shift to an of counsel position with fewer hours and responsibilities. This approach bridges the gap between full-time work and full retirement, providing income while you adjust to your new lifestyle.

Keeping a Small Ownership Stake: Maintaining a small ownership interest can provide ongoing income from the practice's continued success, though this requires careful planning to ensure you're not tied to day-to-day management.

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Tax-Smart Withdrawal Strategies

How your various income sources are taxed greatly affects how long your money will last. Consider these approaches:

Having Different Types of Accounts: Having money in tax-deferred accounts (401(k), IRA), tax-free accounts (Roth), and taxable accounts gives you flexibility to manage your taxes in retirement.

Many lawyers approaching retirement have most of their savings in tax-deferred accounts. 

While these accounts gave valuable tax breaks during high-earning years, they create tax challenges in retirement. Every dollar withdrawn is taxed as ordinary income, potentially pushing you into higher tax brackets.

This can have a cascade effect, affecting the taxation of your Social Security income as well as other income sources.

Strategic Roth Conversions: The years between retirement and Required Minimum Distributions (RMDs) at age 73 (for most) offer a great opportunity to convert portions of your tax-deferred accounts to Roth accounts at lower tax rates.

Let’s look at an example: Let’s say an attorney converted $50,000 yearly from her IRA to a Roth IRA during the five years between retirement and claiming Social Security. 

Though she paid taxes on the conversions, she substantially reduced her future RMDs and created a source of tax-free income for her later retirement years (or her beneficiaries).

Investment losses - Use ‘em wisely!: For investments in taxable accounts, strategically selling positions with losses can offset gains and reduce your tax bill. 

This works particularly well during market downturns, creating tax benefits from temporary market drops.

Smart Asset Placement: Putting tax-inefficient investments (like bonds or REITs) in tax-protected accounts while keeping more tax-efficient investments (like index funds) in taxable accounts can lower your overall tax burden. 

Again, the power of account diversification.

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Putting It All Together

Let's see how these strategies might work together:

A lawyer retiring at 65 has $1.2 million in savings ($800,000 in a 401(k), $200,000 in a Roth IRA, and $200,000 in a brokerage account) and needs $90,000 yearly for expenses.

Social Security for this attorney and spouse will provide $48,000 annually if claimed at Full Retirement Age, or $63,000 if delayed until age 70.

By creating a coordinated plan:

• The spouse claims Social Security at Full Retirement Age
• The attorney arranges an of counsel position providing $40,000 annually for three years
• They draw mainly from the brokerage account during these years
• They convert $30,000 yearly from the 401(k) to a Roth IRA during these lower-income years
• The attorney claims Social Security at 70, maximizing their lifetime benefit

This strategy reduces early pressure on their portfolio, increases their tax-free assets, and maximizes their guaranteed lifetime income.

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But here’s the deal. It’s not all about the numbers…

Next week, we'll explore something just as important as the financial side: the psychological aspects of attorney retirement. 

Beyond the numbers, successfully transitioning from a demanding legal career requires emotional preparation and identity adjustment.

We'll talk about practical ways to maintain purpose and connection while embracing your freedom from practice demands.