Some decisions about withdrawals are straightforward. If you continue to work to age 72, maximizing the chance for growth in these accounts by not taking distributions will almost always make the most sense, especially because distributions from Traditional IRAs are taxable. The opposite scenario of no longer working before age 72 and having no or minimal income sources outside of your Traditional IRA or 401(k) plan assets is also uncomplicated. You would very likely need to tap into these accounts to pay your living expenses.
However, other situations are more complicated. If you have retired at age 62, should you make the decision to claim Social Security benefits to reduce the IRA withdrawals? Or should you wait to claim Social Security benefits at a later age (for a higher benefit) and take more out of your retirement accounts? There are trade offs, including tax considerations, to consider which I discussed in a blog last year.
What about other savings accounts held outside of a Traditional IRA or 401(k) Plan? Should you draw down those assets first, before starting IRA or 401(k) distributions?
There is no one “right” or “wrong” answer to these questions, but they are important. Each option involves trade offs that are unique to each individual or family. Guessing or just deciding based on intuition may be far from a good choice and may have the potential to compromise your retirement plans.
That is why I urge each person to project their income and expenses to evaluate the implications and trade-offs with different choices. The time when we are in are 60s is often a period when household cash flows may often change due to the timing of when certain income streams and expenses begin and end. They can have a great impact on income tax planning, investment strategy, and other important financial planning opportunities.