Most Retirees Miscalculate How to Draw Down Their Savings
The sequence in which retirees tap their accounts affects both tax liability and quality of life, a common oversight among nine in ten.
A vast majority of retirees — roughly nine in ten — are making a critical error in how they sequence withdrawals from their savings, according to a report highlighted by MarketWatch. The mistake is not how much money they have saved, but the order in which they spend it.
Withdrawal sequencing refers to the strategy of deciding which accounts — taxable brokerage, tax-deferred retirement accounts such as traditional IRAs and 401(k)s, or tax-free Roth accounts — to tap first in retirement. The order matters because different account types carry different tax treatments, and drawing from the wrong bucket at the wrong time can trigger unnecessarily large tax bills.
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Beyond the tax implications, poor sequencing can also diminish a retiree's ability to enjoy their money during the years when they are most active and healthy. Financial planners broadly observe that retirees who delay spending from certain accounts in hopes of preserving them may inadvertently shortchange themselves during the early, higher-activity phase of retirement.
The miscalculation is compounded by required minimum distributions, which force withdrawals from traditional tax-deferred accounts beginning at a certain age, potentially pushing retirees into higher tax brackets if other income sources are not properly managed beforehand. Thoughtful sequencing in the years leading up to those mandated withdrawals can reduce long-term tax exposure significantly.
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