First-Year Withdrawal Plan

How do you replace a paycheck that’s no longer coming? Not by selling investments whenever the checking account runs low. Your first year of retirement income deserves an actual plan, because the order you withdraw in and the income you report this year echo for decades, all the way to your Medicare premiums and your tax bracket in your 70s.

Start with the gap, not the portfolio

Before you touch an account, figure out the number. Add up your reliable income: pension, any Social Security, rental income, dividends you already receive. Subtract that from what you plan to spend. What’s left is the gap your portfolio has to fill. That gap, not a percentage rule, is what you’re funding. Everything else is mechanics.

Build the paycheck

The cleanest first-year setup turns lumpy portfolio withdrawals into a steady, predictable deposit:

• Hold roughly a year of the gap in cash, so a bad market doesn’t force you to sell at the bottom.
• Set up an automatic monthly transfer from that cash to your checking account. That’s your new paycheck.
• Refill the cash periodically from the portfolio, on your schedule, not the market’s.

This is the practical answer to sequence-of-returns risk, the danger that a market drop early in retirement does outsized damage because you’re selling shares to live on while prices are down. A cash buffer lets you wait the drop out instead of locking in the loss.

Withdraw in a deliberate order

Which account funds the refill matters. The default order is taxable first, tax-deferred next, Roth last, but the low-income first years are exactly when you should consider bending it, pulling some tax-deferred money or converting while your bracket is empty. The full logic is in Tax-Efficient Retirement Income Order. The point for year one: pick the source on purpose, with the tax consequence in front of you.

The hidden price: this year’s income sets future costs

Your first-year income isn’t just this year’s problem. It ripples. The income you report now sets your IRMAA Medicare surcharge two years from now, and it determines how much of your Social Security gets taxed once it starts. So a year-one plan that ignores those lines can minimize today’s tax and quietly raise tomorrow’s premiums. Map the whole income picture, not just the withdrawal.

For higher-net-worth households

If your portfolio dwarfs your spending, year one is less about funding the gap and more about positioning for the decades ahead. Use the low-income runway for Roth conversions before RMDs begin, harvest long-term gains while you can do it cheaply, and size the cash buffer to your nerves, not a formula. The first withdrawal year is the template for every one after it. Set it deliberately and the next twenty get easier.