Where should you pull money from first in retirement? Here's the 'standard order' new US retirees need to know
Retirement income and savings take many, many forms but don't come with a whole lot of instructions when it comes to which to tap first. Liquid savings? Stocks? Bonds? Home equity? Social Security? Even the sale of equipment from a business can produce a good chunk of change, though where that comes in the pecking order assumes you have a pecking order in the first place.
Confused? It's understandable. Everyone's retirement situation differs so there's no paint-by-numbers guide to pulling money in a foolproof sequence. Rather, a clear-eyed assessment of your situation — best done in conjunction with a finance professional — can help you make sense of where to start.
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The good news is that certain rules of thumb apply to many retirees. This roadmap offers suggestions for drawing from the right sources at the right time, in order.
Cash
Indeed, cash is king for those who hope to kick off the golden years in royal style. If you've built cash reserves that surpass your emergency fund, start your withdrawals there.
For starters, cash doesn't work for you the way investments do. In fact, it loses value in direct proportion to inflation. The effects may startle you, as $2,000 in the year 2000 could purchase $3,600 worth of goods today if the money kept pace with the cost of living. But as cash sitting in a shoebox or a zero-interest checking account? It would still be worth $2,000 today.
Taxable accounts
This is a favorite high-up suggestion of accountants. The logic here is that taxable brokerage accounts are the least tax-efficient accounts because they’re subject to capital gains and dividend taxes.
It’s important to distinguish here between these and retirement accounts such as IRAs and 401(k)s. Those are considered tax-advantaged because they allow you to defer tax payments or grow your money free of taxes.
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Collectibles
Items such as vintage guitars and Beanie Babies can appreciate wildly in value — but downturns in collectibles markets are also common. Either way, collectors with money tied up in such items will want to mark retirement as an ideal time to let go and collect on patience.
Any price check can provide an unexpected jolt of great financial news. A mid-1950s Fender Stratocaster guitar that sold originally for $249.50 ($2,750 in 2024 dollars) can easily fetch $50,000 or more today.
Keep in mind, though, that the IRS taxes the sale of collectibles at a maximum rate of 28%.
Social Security
Because Social Security benefits rise as you defer them, you’ll want to see how this income source fits into your financial picture.
On the one hand, delaying benefits can make a big difference. If you're born in 1960 or later, for example, a benefit of $700 at age 62 would be worth $1,000 at 67.
Yet you could more than make up that difference by investing. Annual stock market returns have been 9.81% for the S&P 500 dating to 1928, according to the nonprofit Official Data Foundation. So that $700 you take at 62, fully invested, would turn into roughly $1,120.
In any event, you may want to take the government payout right away if it delays draining your retirement accounts.
Tax-advantaged retirement accounts
While you may worry about hitting this bedrock financial storehouse, you can take comfort when you do it in the right order after exercising the options mentioned above.
Here, we’re talking pre-taxed accounts (traditional IRAs, 401(k)s, 403(b)s, 457s and SEP IRAs) along with Roth accounts (where taxes are paid upfront).
Overall, Fidelity suggests you withdraw no more than 4% to 5% from your savings in the first year of retirement, and increase the dollar amount annually by the inflation rate. If you can do that without hitting your retirement accounts, then great. And if you need an infusion from them to meet your expenses, you’ll at least know you did it sensibly.
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This article provides information only and should not be construed as advice. It is provided without warranty of any kind.
