Order for Spending Down Assets in Retirement (55, pensions, financial advisor)

[HeelaMonster]

This is not intended to be another Social Security (SS) thread, but recent discussions about SS have me thinking about this broader question:

What is the optimal order for tapping various asset classes in retirement... to pay for daily living expenses, travel, vacations, what have you?

SCENARIO AND ASSUMPTIONS: Let's take a person early in retirement, mid-60s... therefore young enough that required minimum distributions (RMD) have not kicked in. Old enough to be eligible for SS but not yet collecting. A lifetime of saving and investing has resulted in assets in several different categories. Some will be needed immediately (e.g., to buy groceries and gas), some later on (as other sources are drawn down), some may never be needed (and could be left for heirs). Some will be taxable when used, some distributions will be tax-free. With that background, in what order would you start drawing from the following categories, and why? They are numbered for identification, and not to indicate preferred order...

1. Government or corporate pension (there may not be a choice here, if you are eligible and automatically begin receiving at retirement)

2. Cash in money market account (2% interest)

3. Individual stocks in brokerage account (i.e., not in retirement vehicle, with long term taxable gains)

4. Mutual funds outside retirement account (taxable when cashed out)

5. Traditional IRA, 401k, 403b, or other tax-deferred vehicle that will be taxable at time of distribution (lumped together, on the assumption that tax implications are the same across this category)

6. Roth IRA or 401k that will not be taxed at time of distribution

7. Social Security (i.e., start collecting early, so that other sources are left for later)

8. Savings bonds or other instrument with some tax preference, but still taxable

9. Other (if I overlooked something obvious)?

[HeelaMonster]

P.S., thanks to mathjak and others, I am aware of the strategy for spending down some of the taxable assets (e.g., #3,4,5 above), in order to take advantage of the "golden window" between 62-70, which allows you to pay no tax on amounts up to $24k (standard deduction) and less tax up to $48k. And lessen the later impact of RMD. I didn't want to clutter up the OP with that strategy, but it factors into my thinking about (a) when to take SS, and (b) what order to tap those accounts.

[ysr_racer]

This is really something you need to discuss with YOUR financial advisor. If you can't have one, call Fidelity, they can help you.

[HeelaMonster]

Originally Posted by ysr_racer

This is really something you need to discuss with YOUR financial advisor. If you can't have one, call Fidelity, they can help you.

Thanks. This was intended to be a topic of general interest for general discussion, and not a call for help on my personal situation. I am well-advised, but still interested in other's rationale.

[theoldnorthstate]

add annuities as an item? would it differ as a single or married?

As a single, if I get corporate/govt pension, the $24K will be passed right off the bat, then it becomes how much am I willing to pull out and pay taxes on and at what tax level.

i will be following this thread with interest. curious how people would start their draw down.

[ChessieMom]

Well my first thought, is don’t retire until you’re ready to take Social Security. I certainly don’t plan to. I’m not planning on doing any “spending down of assets” myself; As suggested above I’d go with a financial advisor.

[HeelaMonster]

Thanks, old north (I think we may live in the same state)

Originally Posted by theoldnorthstate

add annuities as an item?

We can definitely add more to the list but, before we do, wouldn't annuities fall into the same general situation as pensions? Namely, if you're getting it, you're getting it? In other words, you don't have the discretion to say I won't take it from this pot, while I take it from over here?

Originally Posted by theoldnorthstate

would it differ as a single or married? As a single, if I get corporate/govt pension, the $24K will be passed right off the bat,

You'll likely get there sooner than that, if single. The standard deduction for single is $12200 for 2019, $24400 for married. But your point still holds... incoming (non-disretionary) sources will kick some of us over that amount, right off the bat.

Originally Posted by theoldnorthstate

... then it becomes how much am I willing to pull out and pay taxes on and at what tax level.

Exactly. My question is which pots do you hit first, and which do you leave for later (or never touch at all), if you have that discretion.

[HeelaMonster]

Originally Posted by ChessieMom

Well my first thought, is don’t retire until you’re ready to take Social Security. I certainly don’t plan to.

That's certainly your prerogative, but the question wasn't when to retire, or when to take SS (other than as one of many possible decisions). There are those who don't want or need to take SS at the time of retirement. Or conversely, to work until they are ready to take SS.

Originally Posted by ChessieMom

I’m not planning on doing any “spending down of assets” myself; As suggested above I’d go with a financial advisor.

Perhaps that wording confused or complicated the issue. If you have stopped working and no longer have that income, you are "spending down assets" every time you go to the grocery store or fill up with gas or pay your water bill. Those funds will be coming from somewhere, and presumably you won't be asking a financial advisor every time you write a check.

P.S., not intending to be argumentative, just trying to clarify the point of thread.

[hikernut]

As already mentioned, this will depend a lot on personal circumstances. For myself and my wife, this is the general order I expect, but of course there will be some overlaps.

Taxable (i.e., non-Roth) 401k's
Social Security
Roth 401k's

Then sprinkled all throughout this will be money from taxable accounts. At first it will be the minimum... in other words, only spend the income and dividends that will be taxed in any event. Later on it will likely also include the sale of shares for spending.

Assuming we both have at least an average lifespan, we should exhaust the taxable 401k's while both of us are alive. Most or all of it will come out at 0% and 12% federal brackets.

Finally, if one or both of us lives long enough, probably all of the income will be coming from SS and Roth accounts. Hopefully we wouldn't have to be bothered with filing a tax return at that point. Certainly we would not need to file a federal return, but state taxes will depend on where we eventually retire.

[bgrasser]

We chose to collect monthly payments/distributions from pensions, SS, MRD from IRA's..the rest is for our heirs.