Retirement Withdrawal Order: Is Your Sequence Costing You?
The order in which retirees draw down assets can significantly affect long-term income. Spending cash first may cause income to spike later.
For retirees mapping out how to fund their post-work lives, the sequence in which they tap different income sources can carry real financial consequences — yet many households give the strategy little deliberate thought.
One common approach pairs guaranteed income streams — Social Security benefits and annuity payments — with cash savings and tax-deferred accounts such as IRAs. In the plan highlighted by MarketWatch, retirees lean on Social Security and annuity income first, then draw down cash reserves, before touching IRA funds. Financial planners note that while this structure has intuitive appeal, it is not universally optimal.
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A key risk embedded in spending cash savings early is what happens after those reserves are exhausted. At that point, required minimum distributions from IRAs and other taxable withdrawals can push annual income sharply higher, potentially lifting retirees into higher tax brackets, reducing Medicare cost eligibility, or triggering taxation on a larger share of Social Security benefits. That income surge in later years is a central concern for sequencing strategists.
Advisers generally weigh factors including account types, tax treatment, anticipated longevity, healthcare costs, and legacy goals when recommending a drawdown order. Roth conversions, partial IRA withdrawals in lower-income years, and strategic annuity timing are among the tools used to smooth taxable income across a retirement timeline and limit exposure to bracket creep.
The question of withdrawal sequencing has grown more prominent as defined-benefit pensions have declined and retirees must increasingly manage a mix of account types on their own. Continue reading at MarketWatch.com.
