By Harry Prabandham · Updated September 27, 2026
Retirement Planning
The First Five Years of Retirement Withdrawals: A Planning Framework
Early retirement years carry the most sequence risk and the most tax flexibility. A spending reserve, account order, and income targets all matter.
The First Five Years of Retirement Withdrawals: A Planning Framework
1 / 7
Why do the first five years matter so much?
- Losses early in retirement, while you are also withdrawing, can shrink a portfolio in a way later gains may not fully repair; this is sequence-of-returns risk.
- These years are also often your lowest-income years, before Social Security and required minimum distributions begin.
- Decisions made now, about spending, account order, and conversions, shape taxes and flexibility for decades.
- For people leaving tech, this window often overlaps with final RSU vests, deferred comp payouts, and concentrated stock decisions.
Try Our Free Tools
Full Guide
Why do the first five years matter so much?
- Losses early in retirement, while you are also withdrawing, can shrink a portfolio in a way later gains may not fully repair; this is sequence-of-returns risk.
- These years are also often your lowest-income years, before Social Security and required minimum distributions begin.
- Decisions made now, about spending, account order, and conversions, shape taxes and flexibility for decades.
- For people leaving tech, this window often overlaps with final RSU vests, deferred comp payouts, and concentrated stock decisions.
How does a spending reserve work?
- Some retirees hold one to several years of planned withdrawals in cash or short-term bonds, separate from long-term investments.
- Drawing from the reserve during a downturn can reduce the need to sell stocks at depressed prices.
- The tradeoff is that cash and short bonds may earn less than stocks over long periods and can lose ground to inflation.
- The reserve size depends on other income, spending flexibility, and tolerance for volatility; there is no single correct amount.
Which accounts do withdrawals come from first?
- A common starting order is taxable accounts, then tax-deferred accounts, then Roth, though strict ordering is rarely the most tax-efficient.
- Blending sources, for example filling a low bracket with IRA withdrawals while spending taxable cash, can smooth taxes across years.
- Taxable accounts with high cost basis can fund spending with little taxable gain, while low-basis company stock may carry large gains.
- Roth assets are often kept for later years, heirs, or high-expense years, since qualified withdrawals are tax-free.
Why is this a Roth conversion window?
- Between leaving work and starting Social Security or RMDs (age 73 or 75 depending on birth year), taxable income may be unusually low.
- Converting pre-tax IRA money to Roth in those years adds ordinary income now in exchange for tax-free qualified withdrawals later.
- Conversions can reduce future RMDs, but they cannot be undone and the tax is due for the conversion year.
- The right amount depends on current and expected future brackets, state residency, and the income-tested costs on the next slide.
Income thresholds that interact with withdrawals
- ACA premium tax credits depend on income; the enhanced subsidies expired after 2025, so for 2026 coverage the cliff at 400% of the poverty line returned.
- Medicare IRMAA surcharges use income from two years earlier: 2026 premiums are based on 2024 MAGI above $109,000 single or $218,000 joint.
- A large conversion, stock sale, or deferred comp payout at 63 can raise Medicare premiums at 65.
- These thresholds change with legislation and inflation, so check current figures each year before setting income targets.
Setting and adjusting a withdrawal rate
- The 4% rule comes from William Bengen's 1994 study of historical U.S. returns; it is a planning starting point, not a promise.
- Its results reflect past markets, a specific portfolio mix, and a 30-year horizon, which may not match your situation.
- Guardrail approaches set upper and lower bounds and adjust spending when the withdrawal rate drifts outside them.
- Flexibility, such as trimming discretionary spending after a weak year, can matter as much as the starting rate.
Key takeaways
- The first five years combine the highest sequence risk with the most control over taxable income.
- A spending reserve, deliberate account order, and planned Roth conversions are common tools, each with tradeoffs.
- ACA and IRMAA thresholds make income timing matter, and IRMAA looks back two years.
- Treat any withdrawal rate as a starting point to revisit, and confirm tax projections with a CPA.
Related Topics
Retirement Planning
Sequence-of-Returns Risk in Retirement
Sequence-of-returns risk is the danger that poor markets early in retirement, plus withdrawals, shrink a portfolio more than the same losses later.
Retirement PlanningRetirement Income Distribution Strategy: Account Sequencing
Withdrawal order is choosing which of your taxable, pre-tax, and Roth accounts fund each year of retirement to manage lifetime taxes.
Retirement PlanningRoth Conversions: When They Can Make Sense and What They Cost
A Roth conversion moves pre-tax retirement money into a Roth IRA. You pay income tax now in exchange for tax-free qualified withdrawals later.