Reverse Engineering Retirement: How to Stop Optimizing the Wrong thing...

By: Philip O'Toole

What We See (Over and Over Again)


Oftentimes, folks wait until their 50’s to reach out to a wealth advisor. That is fine. Better late than never. The challenge is the retirement saving pattern is almost always the same:


  • Very large traditional 401k and/or IRA balances due to years of maxing out pre-tax and receiving the full match.
  • A fraction of savings in Roth 401k and/or Roth IRA.
  • Savings and investments in taxable brokerage accounts are a mere afterthought and have received whatever was left over.


On paper, the total amount appears disciplined.


But in practice, it is out of balance.


What has been built is a retirement plan optimized for accumulation… not distribution.

 


A Fair Point (Before We Go Further)


To be fair, many Baby Boomers and Gen X investors didn’t have the same options earlier in their careers.


  • Roth 401(k)s weren’t widely available.
  • Backdoor Roth’s weren’t widely discussed.
  • The entire system emphasized tax deferral.


So, if you’re in your 50s or 60s and heavily tilted toward pre-tax accounts, that didn’t happen by accident.


You played by the rules that were emphasized.

 

 

Think Different


We believe investors can significantly change their outcomes by asking one different question. Instead of “how do I minimize my tax bill this year” ask “what do I want my balance sheet to look like in my 60’s and how do I get started”?


If you are still working today, the landscape is different.

  • Roth 401(k)s are widely available.
  • Backdoor Roth strategies are common.
  • Tax diversification is finally part of the conversation.


Which leads to a simple point:


If you are still underutilizing either Roth or Taxable Brokerage accounts, or both, your balance sheet in your 60’s will be less than ideal.

The goal of your balance sheet at 60 should be flexibility, control, and tax-efficient income in retirement. If that is the case, then optimizing today’s tax-deduction misses the point.


It’s not a bad solution.


It’s just answering the wrong question.

 


Not All Dollars Are Created Equal


At retirement, your dollars are not interchangeable:


  • Traditional accounts → fully taxable as income
  • Roth accounts → tax-free
  • Taxable accounts → capital gains treatment and flexibility


While working, Traditional 401k’s and IRA’s mathematically are the best choice because they lower your tax bill today while growing your investments tax deferred.


Yet most investors do not realize that this is the least favorable bucket in retirement, even less favorable than your Taxable Brokerage Accounts.


Why?


Because every dollar in your pre-tax Traditional Retirement Accounts are fully taxable when withdrawn. This makes:


  • Income harder to manage
  • Flexibility disappears

That’s not a plan.


That’s a constraint.

 


An Ideal Balance Sheet at 60


If you could design it from scratch, your balance sheet would likely look the exact opposite of what we usually see with new clients:


  • A much more meaningful bucket of Roth dollars
  • A meaningful bucket of taxable brokerage dollars enhancing flexibility
  • A smaller, controlled bucket of tax-deferred dollars


Why?


Because retirement isn’t just about having money.


It’s about having control over how and when you use it.


Or, to borrow a favorite engineering term:


You want more “degrees of freedom” in retirement.

 


The Problem With “Break-Even” Thinking


Our industry uses “break-even” thinking more often than it should. We hear it quite a bit when making Social Security claiming decisions, but also with Traditional vs Roth decisions.


You’ve probably heard this:


“If your tax rate will be lower later, defer. If higher, use Roth.”


Clean. Logical. Incomplete.


Because it assumes:


  • You know your future income tax rate
  • You know your future income needs
  • Places no value on having an increased size of tax-free dollars at 60
  • Your savings amount today will be lower if you choose tax-free

 

That’s a lot of guesswork and overlooks the huge value tax-free dollars have over taxable dollars


More importantly, it ignores something more valuable:


Optionality.

Even if you pay slightly more tax today to build Roth assets…


You gain flexibility later.


And in retirement planning, “degrees of freedom” > freedom.

 


Reverse Engineering Retirement in Phases


One thing that may help current professionals when making their retirement plan contribution decisions is to think of their tax-paying years in three phases, working backwards:


Ages 60–80: Leverage the Flexibility You Have Built


This is where structure matters. You are no longer working and must leverage your investments to supplement your lifestyle.


If most of your dollars are pre-tax:


  • Every withdrawal increases your taxable income
  • Your income tax bracket during this phase is currently unknowable
  • You have limited control to change your equation once you arrive at this phase


If you’ve built multiple buckets:


  • You can manage your income tax year by year
  • Be strategic in how you invest in each bucket and where you take withdrawals
  • You can employ advanced planning strategies to further lower your tax bill in retirement and for the next generation, ie Roth Conversions

 

Ages 40–60: Be Strategic During Your Peak Earning Years


This is the window most people waste. Your 40’s and 50’s are two decades of peak and growing earnings. At some point you will launch your kids and may receive an inheritance.


Instead of defaulting to pre-tax, this is the phase to:


  • Increase Roth contributions
  • Consider Roth conversions
  • Build taxable assets


Yes, you may pay more tax today.


That’s not always a mistake.


Price is what you pay. Value is what you get.

 

Ages 20–40: Build Good Habits Early and Often


Pay yourself first. Maximize the company match. Steer dollars to Roth when possible.

 


Roth accounts are not Just a Bet—They are a Tool


It is not just about guessing future tax rates compared to current tax rates.


It’s about the flexibility and control Roth accounts provide in your later years and beyond:


  • Generate tax-free income
  • Avoid forced distributions
  • Control your tax situation


The value isn’t just the tax savings.


Ask yourself, how much tax-free income can I generate over 20-30 years of retirement under normal circumstances from my Roth investments compared to my Traditional investments?

 


Don’t Overlook Taxable Accounts Either


Taxable accounts are often an afterthought because they don’t offer an upfront reward.


But in retirement, they are also a tool giving:


  • Favorable capital gains treatment
  • Liquidity without forced withdrawals
  • Strategic income control
  • Step-up in basis for heirs
  • Support Roth conversion strategies in retirement


They are often the most overlooked and underutilized tool in retirement planning.

 


Final Thought: Keep Your Eye on the Prize


The best retirement plans aren’t built one year at a time.


They’re built by stepping back and asking:


Where am I trying to go?


Then working backward.


Because if you don’t know where you want to go, any plan will take you there…


And our experience tells us that many are drifting into retirement.


And drifting is how people end up with:


  • Too much in tax-deferred accounts
  • Too little flexibility
  • Fewer control over their outcomes than anticipated


Not because they failed.


No, they optimized the wrong thing because they were answering the wrong question.