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Planning for retirement doesn’t end when you stop working. In fact, one of the most important financial decisions you’ll face in retirement is the order in which you withdraw your money.

In this episode of Money Wisdom, Jake Doser, CFP®, CPWA® and Nicholas J. Colantuono, CFP® discuss how to create a solid withdrawal strategy, the importance of withdrawal order, and practical tips for making your retirement savings last.

The Shift from Saving to Spending

During your working years, you worked hard and saved diligently to build your nest egg. Now, you’re ready to start drawing from those accounts. This indicates a significant change in your financial strategy. It’s not just about taking money out; it’s about doing it in a way that maximizes your income while minimizing your tax burden.

Why Withdrawal Order Matters

One of the biggest threats in early retirement is “sequence of return risk.” This happens when the market dips just as you start drawing funds. If you’re pulling money out of a falling market, you may experience losses that are difficult or nearly impossible to recover from.

For instance, if you withdraw from an account that has dropped 30%, you’re depleting your assets more quickly and giving them less opportunity to recover. That’s why it’s important not to have all your money exposed to the market at the same time.

Balancing Risk and Safety

Many people consider themselves conservative investors yet unknowingly have 100% of their assets in market-exposed investments. Understanding where your money is invested is a critical first step.

A good withdrawal strategy strikes a balance between risk and safety. Keeping some of your money in stable, principal-protected accounts gives you flexibility. You can draw from these safer accounts during periods of volatility and rely on growth-oriented accounts when the market is strong.

Which Accounts to Draw from First

There are generally three types of retirement money: pre-tax accounts (such as traditional IRAs and 401(k)s), Roth accounts (Roth IRAs and 401(k)s), and after-tax brokerage accounts. In general, we recommend withdrawing from pre-tax accounts first to help manage required minimum distributions (RMDs) and reduce future tax exposure.

Planning Ahead

Ultimately, your ability to strategically draw from your accounts depends on how well you planned during your working years. If your retirement savings aren’t diversified across account types, your options may be limited. By working with a financial advisor, you can devise a withdrawal strategy that doesn’t just protect your assets but also provides a path toward a more secure retirement.

Curious how your 401(k) fits into your withdrawal strategy? Get your free Ultimate 401(k) Guide by texting “GUIDE” to 800-757-0436.