Retirement Spending Made Simple

Andrew Busa, MSPFP, CFP^®, MPAS^®, CCFC

Director of Financial Planning

When it comes to retirement, it’s not just about tapping your savings, it’s about the order in which you do it. Here’s the order we recommend for most clients:

Your first source for everyday spending should be the cash savings you’ve accumulated. Tapping into cash accounts initially allows your investments to continue to compound as long as possible. One caveat: Keep your emergency fund intact—don’t touch that safety net unless it is absolutely necessary.

Second, turn to your traditional individual retirement accountsA type of account in which funds can be saved and invested without being subject to tax until the account holder reaches retirement age. (IRAs) and tax-deferred accounts. You’ll be obligated to make withdrawals from these accounts in the form of required minimum distributionsA required minimum distribution is the amount of money that must be withdrawn each year from tax-deferred retirement accounts once the beneficiary reaches retirement age (72, according to IRS rules). (RMDs) once you turn 73. That said, if you don’t need to use your RMDs for income because you’re still using cash reserves, reinvesting those required distributions is something to consider.

Next, for expenses that can’t be covered by your cash and RMDs, turn to your taxable brokerage accounts. But be sure to pay close attention to what you’re selling when you tap these funds: Selling highly appreciated stocksA financial instrument giving the holder a proportion of the ownership and earnings of a company. can result in a hefty tax bill. (If you need some assistance with this, give us a call—we’re here to help.)

Last but not least, turn to your Roth accounts. Funds held in a Roth grow tax-free forever. Heirs don’t pay taxes on a Roth when they inherit it, either. This makes them a wonderful estate planning tool—and the least favored option for everyday spending. The longer you leave Roth money untouched, the greater your potential gains down the road.  

And that’s how the “retirement tap” works. Unfortunately, the beer is not included.