Open your 401(k) or IRA statement and look at the balance. It feels like your money. You earned it, you saved it, you watched it grow.

But if you saved it before tax, you have a silent partner: the tax system. Part of that balance will be paid in income tax when you take it out. And nobody can tell you today what tax rates will be when you retire.

A balance is not an income

Here's the question I ask every client: what will your savings actually pay you each month, after tax?

Most people have never worked it out. They know the balance. They don't know the paycheck. And those are very different numbers, because:

  • Withdrawals from pre-tax accounts are usually taxed as income.
  • Future tax rates could be higher or lower than today's. Nobody knows.
  • Taking out money in a bad market year means selling low, which shrinks what's left.
  • Many retirement accounts have rules about when you must start taking money out.
A balance isn't an income. We work out what your savings will actually pay you, after tax, in a bad market.

The idea of tax buckets

Think of your savings in three buckets:

  1. Taxed now: everyday savings and regular investment accounts. You've already paid tax on the money you put in.
  2. Taxed later: most 401(k)s and traditional IRAs. You get a tax break today, and pay tax when you take the money out.
  3. Taxed differently: accounts and options that follow different tax rules, such as Roth accounts. Each has its own rules, limits and trade-offs.

Many hard-working people, especially high earners, have almost everything in the "taxed later" bucket. That leaves them with very few choices in retirement. When everything comes from one bucket, every withdrawal is taxed the same way.

Having money in more than one bucket gives you flexibility. In a year when you need extra income, you can choose where it comes from. That's what planners call tax diversification: not a trick, just more choices.

What to do with this

You don't need to change everything. Start by knowing:

  • Roughly how much you have in each bucket.
  • What monthly income your savings might realistically provide.
  • Whether your plan still works if the market falls the year you retire.

I work alongside your tax adviser or CPA on the tax details. My job is to help you see the whole picture, in plain English.

The scorecard's Retirement Income & Taxes area is a good first check on where you stand.

This post is general education, not financial, tax, legal or investment advice, and not a recommendation of any product. Insurance products are offered only in states where the agent is licensed and are subject to underwriting. Talk to your own tax adviser about your situation. Related: Retirement & taxes