Most retirees treat every retirement account the exact same way — same investment mix, same withdrawal strategy, same tax planning. But there’s a critical distinction that can dramatically improve your plan: separating your Live On assets (the money you’ll spend during your own lifetime) from your Leave On assets (the money you intend to pass on to your children or grandchildren).
This single step is one of the highest-leverage moves you can make once you have substantial retirement savings.
Step 1: Separate Your Live On Assets from Your Leave On Assets
Most people never do this. They lump everything together and miss the opportunity to manage each bucket with the right strategy.
Here’s how to do it accurately:
Run a realistic retirement spending plan. How much do you need each year to live the life you want, including taxes, inflation, and healthcare? Subtract your guaranteed income sources — Social Security, pensions, rental income, etc. The gap you’ll need to fill from your savings becomes your Live On bucket. Everything left over becomes your Leave On bucket.
In the modeling software I use in my practice, this distinction is easy to see. Your surplus — or Leave On assets — shows up as the Safety Margin in both current dollars and future dollars. Live On assets are simply your total assets minus that Safety Margin.
Most clients I work with are surprised to discover that 40% to 70% of their retirement savings actually falls into the Leave On category.
What Happens If You Don’t Separate Them?
This is what most people do — they don’t separate Live On versus Leave On. And it usually leads to a suboptimal plan in both directions.
You take more risk than necessary with money you’ll need to spend soon, increasing the chance of sequence-of-returns problems.
At the same time, the opposite mistake is also very common — and it’s one of the biggest mistakes I see people making. They are way too conservative with their Leave On assets because they assume they will need to tap into them at some point in the future and are afraid to “put them at risk,” even though they may never touch those assets for decades.
This excessive conservatism causes you to leave a lot of money on the table in terms of lost investment opportunity cost. I see this all the time, especially among do-it-yourself investors.
It’s okay — and actually recommended — to be conservative with your first spending bucket, that 1- to 5-year bucket. But to leave your 30- to 40-year legacy bucket invested like it’s a current spending bucket is a big mistake I see over and over again.
In short, not separating the buckets usually means paying more in taxes, taking more risk than necessary with your spending money, being too conservative with your legacy money, and ultimately leaving less to the people you care about.
How to Minimize Taxes on Your Live On Assets
Once you’ve identified your Live On bucket, here are the four strategies we use most often to reduce taxes on that money:
- Strategic Roth Conversions Convert traditional IRA dollars to a Roth IRA over time while you’re still in a lower tax bracket. You pay the tax once now, and future withdrawals for living expenses become completely tax-free.
- Tax-Efficient Withdrawal Sequencing Be deliberate about the order you pull money from different accounts — generally taxable brokerage first, then tax-deferred, and finally tax-free accounts. This can keep your taxable income lower for longer.
- Smart Asset Allocation for Live On Money Since these dollars need to be available when you need them, use a more conservative allocation with higher bond and fixed-income exposure. This reduces volatility and helps you avoid being forced to sell stocks in a down market just to cover living expenses.
- Qualified Charitable Distributions (QCDs) If you’re charitably inclined and age 70½ or older, direct RMDs — or even larger amounts — straight from your IRA to qualified charities. This satisfies your RMD requirement, reduces your taxable income dollar-for-dollar, and can help you stay below IRMAA thresholds.
I can already hear some of you thinking, “Well, if I give all my money to charity, I avoid taxes, but I also lose the money to spend.” That’s true. The key to good charitable planning is to give away the money you don’t need to live on, so you reduce the taxes on the money you are living on.
And yes, your kids might wonder if they lose access to that money too. Not necessarily — not when we pair QCDs with annuity guarantees that can protect the principal for your family. If you’re interested in how we make that work, just let me know.
When you combine these strategies for your Live On bucket, most clients see a meaningful reduction in lifetime taxes, lower Medicare premiums, and greater confidence that their money will last as long as they do.
I’ve put together a brand-new guide called the Smart Tax Shield Legacy Playbook that covers both last week’s tax strategies and this deeper dive into Live On versus Leave On planning. It’s available for free download on my website.
Even better, I’m still offering to build your own Smart Retirement Model at no cost or obligation while time slots are available. You’ll see exactly how much of your savings is truly Live On money and how the right tax strategies can improve your plan.
Ready to explore what’s possible for your situation? Book a quick 15-minute call on my calendar at LeonardiFamilyWealthcare.com.
There really is a smarter way to retire.