Retirement Withdrawal Order: Is the Right Sequence Social Security First?
The order in which retirees draw down assets can significantly affect long-term income. One common plan sequences Social Security, annuities, and cash before tapping IRAs.
Retirees navigating the transition from saving to spending often overlook one of the most consequential decisions they face: the sequence in which they draw down their assets. A withdrawal strategy that may feel intuitive — spending guaranteed income first, then moving through cash reserves before touching tax-advantaged accounts — can carry unintended consequences that surface years into retirement.
One approach gaining attention sequences income sources as follows: Social Security benefits and annuity payments first, then liquid cash savings, and finally individual retirement accounts. Proponents argue this preserves tax-deferred growth inside IRAs for as long as possible. However, financial planners caution that depleting cash reserves early can cause taxable income to spike sharply later, particularly once required minimum distributions from IRAs kick in.
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The timing of when retirees begin drawing Social Security also interacts with this sequencing question in meaningful ways. Delaying Social Security typically increases monthly benefits, but doing so may require leaning on savings or IRA withdrawals in the interim — the reverse of the strategy described. Each retiree's tax bracket, health outlook, and spending needs make a single universal sequence difficult to prescribe.
Analysts note that spending all available cash first, before other income sources, can create a surge in income in later years driven by required minimum distributions, potentially pushing retirees into higher tax brackets or affecting Medicare premium calculations. Strategic Roth conversions during lower-income years are one tool advisers often recommend to smooth that future tax burden.
Retirement income planning has grown more complex as traditional pensions have declined, placing greater responsibility on individuals to manage multi-source income streams efficiently. Continue reading at MarketWatch.com
