7 Things To Consider Before Making Your First Retirement Account Withdrawal
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Jordan Rosenfeld
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Molly Sullivan
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For retirees approaching 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 that the first withdrawal decision often locks in patterns around income, taxes and lifestyle that are difficult to undo later.
Here are seven considerations to think about before you ever make your first retirement account withdrawal.
1. A Withdrawal Strategy Is Not the Same as a Financial Plan
Many retirees focus on how much to withdraw in the first year without looking closely at their long-term financial needs.
“[T]hey need a financial plan not just a withdrawal strategy,” said Evan Drury, a chartered financial consultant at Gateway Financial Partners.
A withdrawal strategy addresses how money comes out. A financial plan addresses how decisions work together over time. Before any money comes out, retirees need to step back and look at the full picture. Drury said key areas include:
- Income vs. expenses: This gives you a net number to work with.
- Insurance: Will they want life insurance to provide a windfall at their passing or long-term care insurance to protect assets while living?
- Tax plan: Taxes need to be viewed over a lifetime not just around April.
- Estate plan: Determine who will care for you financially and physically if needed and who gets your assets after you pass.
Without a broader plan, withdrawals can work against long-term goals.
Learn More: Warren Buffett’s Advice To Prepare for a Recession Is S-Tier
2. Your First Withdrawal Often Sets the Pattern for Years
The first withdrawal often becomes a template for spending in retirement. “I see clients set up a recurring monthly payment from a retirement account. It’s an easy way to recreate your paycheck and then set it and forget it,” said Evan Potash, an executive wealth management advisor at TIAA.
The problem is that it may not hold up over time. “Your income strategy should be reviewed at least annually,” he said.
Drury added that tying income to a strict 4% withdrawal rule “without anything more dynamic” can limit lifestyle unnecessarily. “This is what I’ve seen a lot in my time as an advisor and there are better approaches such as guardrails, which means going up to a 5% distribution in good times and dropping the distribution to 3% in tough times,” Drury said.
More flexible strategies allow retirees to adjust spending without undermining long-term security.
3. Taxes Can Take a Bigger Bite Than Retirees Expect
Taxes are often the most underestimated part of retirement withdrawals, particularly from tax-deferred accounts like traditional IRAs.
Chad Silver, tax attorney and CEO and founder of the Silver Tax Group, said retirees often forget that “the IRS is a silent partner.” He added, “The most shocking moment of my experience is when you were making a withdrawal of $50,000 and the federal tax deduces $38,000.”
Silver said poor withdrawal sequencing can increase lifetime taxes. “In the process of tapping, you generally should tap taxable brokerage accounts before tax-deferred IRAs since they can grow tax-free,” he advised.
Without tax-aware planning, early withdrawals can trigger higher brackets and reduce flexibility later.
4. Timing and Market Conditions Can Limit Future Flexibility
When withdrawals begin also matters. Potash warned that early withdrawals during market downturns can permanently affect portfolio longevity.
“Timing is everything. If you take a sizeable withdrawal from your portfolio when you first retire, it can set the tone for future growth for a portfolio. This is especially true during downward volatility.”
This is called sequence of return risk, he explained — the risk that poor market returns early do more damage than the same returns later.
Drury advised retirees to maintain an emergency fund so they can pause or limit withdrawals if needed. Between six months and one year of living expenses is a reasonable target.
5. Social Security and Other Income Sources Are Part of the Equation
Social Security timing should be coordinated with other income sources. Potash described Social Security income as being similar to a deferred annuity.
He reminded retirees that claiming before full retirement age leads to a permanent reduction. “By deferring beyond full retirement, you get an 8% increase per year.”
Drury said, “Everything is intertwined and analytics need to be run to determine if it’s worth it to wait or if taking Social Security a bit earlier would benefit the overall picture.”
6. Emotional Spending Can Undermine Even Solid Plans
Retirement is not just a financial transition, but an emotional one. “Retiring is exciting. You have more free time to travel and see the world. We call this phase of retirement the go-go years,” Potash said.
That excitement can lead to large early withdrawals without fully considering tax and longevity impacts.
Drury said this doesn’t mean you should delay enjoyment. “But some can do them right away and others may need to space them out or find financing options to make it more manageable.”
7. A Financial Plan Should Be in Place Before Any Money Comes Out
These experts agree the first withdrawal should come only after a comprehensive financial plan is in place, including a short-term plan of around five years and a longer projection covering 20 to 30 years. Then, review your plan every year with an advisor.
Careful planning and professional coordination can reduce surprises, penalties and long-term regret. Flexibility and review are just as important as the initial plan.
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