Most people spend their working years focused on accumulation. Contribute to the 401(k), add to the IRA, build the balance so you have enough to last through retirement. It is a straightforward objective with a clear scoreboard.
Retirement, however, has different objectives. The balance stops growing from contributions and starts getting drawn down. This can be an unsettling reality for some! The question shifts from “how can I save more” to “how do I make sure this lasts.”
Why the second job is harder
During the accumulation years, a market decline can actually work in your favor. You make contributions, you buy at lower prices, and time does the rest. However, once you start withdrawing, the same decline works against you, because selling assets to fund living expenses in a down market means you have fewer shares when recovery happens.
For the first time, the order in which returns happen matters more than just the average return over time. Two retirees with identical average returns can end up in very different places depending on when the bad years arrive. A down year at the start of your retirement can be bad news for your account’s longevity.
What a distribution plan tries to answer
A retirement income plan generally works through a few questions:
- What are the expenses that must be covered every month, and what is discretionary?
- Which sources of guaranteed or predictable income already exist, such as Social Security or a pension?
- What is the gap between those two numbers, and which accounts fill it?
- Which accounts should be drawn on first, and what are the tax consequences of that order?
- What happens to the plan if markets fall early, if health costs rise, or if one spouse outlives the other?
Taxes are a big piece of the puzzle
Withdrawals from tax-deferred accounts are generally taxable as ordinary income. Required minimum distributions can push taxable income higher than you might have expected. The mix of taxable, tax-deferred, and tax-free accounts affects what you keep and what goes to the government. You need to plan and coordinate these withdrawals with taxes in mind to ensure your retirement lasts as long as you do. This sometimes confusing mix of accounts is best approached with intentional planning rather than last-minute improvisation.
How can I plan for this?
Before you retire, we know what you need most for accumulation is consistency. Once you’ve retired, what you need most for distribution is coordination. If your retirement plan is a balance figure and not a mapped-out strategy for turning that balance into income in the right order, get your plan in order today. Not sure what to do? We’ve got you covered. Future “you” will thank you for taking care of this today.
This material is for informational purposes only and is not intended as tax, legal, or individualized investment advice. Contribution limits, tax rules, and eligibility requirements change over time. Please consult a qualified professional like one of our advisors about your own situation before making any decisions.
