What Are the Three Buckets of Retirement Savings?

Retirement introduces a new challenge for pre-retirees and retirees: how can I withdraw the assets I’ve spent decades saving and growing in a sustainable way? Our clients often come to us with common retirement spending questions, such as:

• Which account should I draw from first?
• How do taxes affect my retirement income?
• Will my savings last?

Unlike the accumulation phase of your life, retirement income planning requires strategic coordination of your resources to maintain flexibility, manage taxes, and reduce the risk of outliving your money. When developing a withdrawal strategy, it’s helpful to view your assets in three buckets: cash, taxable brokerage accounts, and retirement accounts.​

Let’s explore these categories and the role they play in supporting retirement spending.

What are the Three Buckets of Retirement Savings?

Most retirees don’t have just one account but multiple savings vehicles, each with its own tax treatment and planning implications. They can generally be categorized into three primary buckets:

What’s the Cash Bucket in Retirement?

The cash bucket includes assets from accounts such as savings and checking, as well as money markets and CDs, which provide easily accessible liquidity when needed. Cash is also more stable and less impacted by market volatility, making it useful for short-term expenses or as emergency reserves in retirement. It can also be a strategic lever for retirees who want to avoid selling investments at a loss during market volatility.

On the other hand, cash has limited growth potential, yields can be lower than those of other savings vehicles, and it does not keep pace with inflation, which reduces purchasing power over time.

What Is the Taxable Brokerage Accounts Bucket?

Bucket number two typically includes assets found in a portfolio, such as stocks, bonds, mutual funds, and other investments. Brokerage accounts are funded with after-tax dollars and could have tax planning implications, including:

• Capital gains taxes are triggered when you sell investments for withdrawals. The rate depends on how long you hold the asset: short term (less than a year) or long term (more than a year). Long term capital gains are taxed at preferential rates, rather than short term capital gains, which are taxed as ordinary income.
• Dividends increase taxable income and are taxed annually. Some dividends are taxed as ordinary income (ordinary dividends) and some are taxed at preferential tax rates (qualified dividends).
• Tax-loss harvesting may be possible to offset losses. Since realized losses can offset realized gains, this strategy involves recognizing both losses and gains in the same period to help manage the tax impact.

Taxable brokerage accounts are attractive because, unlike traditional retirement accounts, they have no contribution limits, no early withdrawal penalties, and no required minimum distributions (RMDs). Retirees often use these assets to help bridge resources during the early years of retirement, essentially replenishing their cash bucket.

However, retirees should keep in mind that taxable brokerage accounts are highly correlated with market volatility. Additionally, selling investments is often a taxable event, and should be coordinated with your taxable income, deductions, and tax bracket to manage your liability and capture more favorable capital gains tax rates.

What Is the Retirement Accounts Bucket?

Finally, pre-retirees may have tax-advantaged retirement savings accounts, which generally fall into two categories:

• Tax-deferred accounts, such as 401(k)s, traditional IRAs, and SEP IRAs, are funded with pre-tax dollars, which can provide an immediate tax deduction on contributions made in the same year. Taxes are deferred until retirement; qualified withdrawals, including required minimum distributions (RMDs), are subject to ordinary income tax and should be planned for accordingly.
• Tax-free accounts, such as a Roth IRA or Roth 401(k), are funded with after-tax dollars. While contributions are subject to taxes in the year they’re made, growth and qualified withdrawals are tax-free, a significant benefit in retirement. Additionally, they don’t require RMDs and will not increase your taxable income.

These accounts often serve as a primary source of income in retirement, so strategically timing withdrawals and avoiding early withdrawal penalties are critical to creating sustainable income.

Why Does the Order of Withdrawals Matter in Retirement?

Since retirees have multiple accounts that serve as income sources, understanding the differences and implications of when and how withdrawals occur can help improve tax-efficiency, longevity, and resilience during down markets.

Rather than a single pool of funds, balancing tax-advantaged and taxable assets can provide greater flexibility and help retirees in the following three ways:

Manage Taxable Income: There are income-based thresholds that affect Medicare premiums and Social Security taxes, which retirees can potentially avoid crossing by managing their taxable income. For example:

• To reduce taxable income, a retiree may focus on withdrawals from taxable brokerage accounts, where they may be subject to a more favorable capital gains tax rate or avoid capital gains altogether.
• In contrast, large withdrawals from tax-deferred accounts, which are taxed as ordinary income, could push retirees into a higher tax bracket, affecting their benefits and tax liability.

Plan for RMDs: Some tax-deferred accounts, like a traditional IRA or 401(k), require withdrawals once a retiree reaches RMD age. The annual withdrawals are based on the account balance and the retiree’s age. RMDs are also taxed as ordinary income. For example, if a retiree has a large IRA balance, their future RMDs could significantly increase their taxable income, pushing them into a higher tax bracket, potentially affecting their Social Security taxes and Medicare premiums.

• Most retirees experience a meaningful income dip in the early years of retirement, before Social Security and RMDs begin. These lower-income years can create an opportunity to take withdrawals from tax-deferred accounts at a lower ordinary income tax rate.
• In this case, a retiree may choose to take smaller withdrawals during that period to gradually reduce the account balance, lower future RMDs, and help smooth taxable income over time. These lower income years may also present opportunities for Roth conversions. 

Respond to Changing Market Conditions: Having assets across different savings vehicles can give retirees greater flexibility in when and where to draw funds, especially during down-market periods.

• Sequence of returns risk, or the risk of experiencing negative returns in early retirement, means selling investments at a loss can affect a retiree’s portfolio in the long term.
• A retiree can address this risk by coordinating withdrawals with other income sources or with more stable assets, such as cash reserves, during market volatility. This approach gives a retiree’s investments time to recover and helps them avoid selling shares at a loss that could be exponentially more difficult to recover over time.

How Can I Develop a Tax-Efficient Withdrawal Strategy?

As you shift from saver to spender in retirement, when and where you begin your withdrawals is just as critical as how much you have saved. A coordinated strategy that balances taxable, tax-deferred, and tax-free assets can help retirees manage their taxable income, be more flexible during down markets, and extend their portfolio’s longevity.

​Every retirement is different, and the timing and sequence of withdrawals rarely have firm rules. Instead, navigating retirement withdrawals usually requires a combination of strategies, regular monitoring, and adapting over time. As your goals shift, or markets and tax laws change, so will your plan. At CCMI, we guide clients through the process to help support financial stability and peace of mind, including:

• ​Coordinating withdrawals across account types to help manage taxes and avoid income spikes
• Planning for timely decisions, such as claiming Social Security, preparing for RMDs, and managing Medicare premiums
• Making adjustments based on personal circumstances, new legislation, or market activity

Approaching retirement or already retired? Please contact us if you need guidance on creating a personalized, sustainable withdrawal plan that considers your broader financial picture and goals. 

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