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For people retiring or newly entering retirement, the first withdrawal from a retirement account often feels like a long-awaited milestone. After years of saving, it’s easy to assume that spending should now be straightforward. But financial advisors and tax professionals say the first withdrawal decision often gets caught up in income, taxes and lifestyle patterns that are difficult to fix later.
Here are seven things you should consider before making your first retirement account withdrawal.
1. Withdrawal strategy is not the same as financial planning
Many retirees focus on how much to withdraw in the first year without considering their long-term financial needs.
“They need a financial plan, not just an exit strategy,” said chartered financial adviser Ivan Drury. Gateway Financial Partners.
The withdrawal strategy dictates how the money is withdrawn. A financial plan outlines how decisions will work together over time. Before any money comes out, retirees need to step back and look at the whole picture. Drury said key areas include:
- Income vs Expenses: This gives you a net number to work with.
- Insurance: Would they like life insurance to provide unexpected benefits upon their demise or long-term care insurance to protect assets while they are alive?
- tax planning: Taxes need to be looked at throughout life, not just around April.
- Estate Planning: Determine who will take care of you financially and physically if needed and who will receive your assets after you pass.
Without comprehensive planning, withdrawals may work against long-term goals.
learn more: Warren Buffett’s advice for preparing for a recession is S-tier
2. Your first withdrawal often sets the pattern for years
The first withdrawal often becomes a blueprint for spending in retirement. “I’ve seen clients set up recurring monthly payments from a retirement account. It’s an easy way to redistribute your pay check and then set it and forget it,” said Evan Potash, an executive wealth management consultant. TIAA.
The problem is that it may not hold up over time. “Your income strategy should be reviewed at least annually,” he says.
Drury said tying income to a strict 4% withdrawal rule “without much mobility” could unnecessarily limit lifestyle. “This is what I’ve seen a lot in my time as an advisor and there are better approaches like guardrails, which means going up to a 5% distribution in good times and reducing distributions to 3% in tough times,” Drury said.
More flexible strategies allow retirees to adjust spending without reducing long-term security.
3. Taxes may take a bigger hit than retirees expect
Taxes are often the most underestimated part of retirement withdrawals, especially from tax-deferred accounts like traditional IRAs.
Chad Silver, tax attorney and CEO and founder Silver Tax GroupSaid that retirees often forget that “the IRS is a silent partner.” He added, “The most shocking moment of my experience is when you were withdrawing $50,000 and the federal tax deducts $38,000.”
Silver said poor withdrawal sequences could lead to higher lifetime taxes. “In the tapping process, you should generally tap taxable brokerage accounts first before tax-deferred IRAs because they can become tax-free,” he advises.
Without tax-conscious planning, early withdrawals may trigger higher brackets and reduce flexibility later.
4. Timing and market conditions may limit future flexibility
When the withdrawal starts also matters. Potash warned that early withdrawals during market downturns could permanently impact the longevity of a portfolio.
“Timing is everything. If you withdraw large amounts from your portfolio when you first retire, it can set the stage for future growth for the portfolio. This is especially true during periods of downward volatility.”
This is called sequence of returns risk, he explained – the risk that produces returns early in the market causes greater losses than the same returns later.
Drury advised retirees to maintain an emergency fund so they can pause or limit withdrawals if needed. Six months to a year of living expenses is a reasonable goal.
5. Social Security and other income sources are part of the equation
Social Security timing must be coordinated with other income sources. Potash likened Social Security income to a deferred annuity.
He reminded retirees that claiming before full retirement age results in a permanent reduction. “Going past full retirement, you get an 8% raise per year.”
“Everything is interconnected and analysis needs to be run to determine whether it makes sense to wait or whether taking Social Security a little earlier would benefit the overall picture,” Drury said.
6. Emotional spending can undermine even solid plans
Retirement is not just a financial change, but also an emotional change. “Retirement is exciting. You have more free time to travel and see the world. We call this stage of retirement the go-go years,” Potash said.
This enthusiasm can lead to large early withdrawals without fully considering tax and longevity implications.
Drury said that doesn’t mean you should delay enjoyment. “But some people can do them right away and others may need to spread them out or find financing options to make it more manageable.”
7. A financial plan should be ready before any money is withdrawn
These experts agree that the first withdrawal should occur only after a comprehensive financial plan has been implemented, including a short-term plan of about five years and a longer projection covering 20 to 30 years. Then, review your plan with an advisor every year.
Careful planning and professional coordination can minimize surprises, penalties, and long-term regrets. Flexibility and review are as important as initial planning.