Restructuring Finances for Retirement

After you retire, the pay will stop coming and while the annuity will start, it won’t be as large as the pay was. You may have to tap your savings for spending money.

One strategy is to build up a cash reserve before you retire. You should aim to build up a reserve of at least one years’ worth of spending: if you think you’ll need $60,000 a year from your portfolio for example, you should aim to put $60,000 into a money market fund or bank accounts.

If you use a money market fund, you can arrange for automatic transfers to your checking account: say, $5,000 per month. In this way, money from your cash reserve will replace the paychecks you’re no longer receiving.

Next, you have to figure out a way to replace the cash that has gone into your checking account. You might sell stocks or bonds every six months, to replenish your cash reserve. After you reach age 70 1/2, required withdrawals from your IRA or retirement savings programs such as the TSP must begin, and that money can go into your stash of cash.

Another strategy is to tap your taxable accounts first. This permits your accounts to continue to grow, tax-deferred.

If you withdraw money from your accounts before age 59 1/2, you usually will owe income tax and a 10 percent penalty, too. After 59 1/2, you’ll be beyond the 10 percent penalty. Then there might be times when it makes sense to draw down your IRA—for example, if your future tax bracket will be higher, either because of new tax laws or because of required distributions from your IRA.