When you need money for living expenses after retirement, should you use cash, bonds, or stocks first?
Using cash first allows you to hold stocks and bonds for longer. However, if your cash runs out too quickly, you may not have enough reserve funds available during a market downturn.
Conversely, selling stocks that have gained substantially may help realign your asset allocation, but it can also result in taxes and trading costs. Selling stocks during a market decline may lock in losses and cause you to miss a subsequent recovery.
For near-term living expenses, consider this approach— the retirement bucket strategy. Even after applying it, you must decide which asset to use for actual living expenses by considering market conditions, asset allocations, taxes, and regular income together.
A retirement withdrawal order is not a fixed rule that requires you to choose cash, bonds, or stocks and continue using them in the same order. It is a process of calculating the net amount needed for living expenses and selecting an appropriate asset after reviewing allocation differences and selling costs.
What Is a Retirement Withdrawal Order?
A retirement withdrawal order is a plan that establishes how you will use cash-equivalent assets, bonds, stocks, and other investments to cover living expenses during retirement.
Before retirement, it is important to divide and invest part of your income across several assets. After retirement, however, you must convert those accumulated assets into living expenses while managing the remaining portfolio so that it can last as long as possible.
Therefore, deciding on a withdrawal order involves more than simply using the assets with the smallest price fluctuations first.
You should consider all of the following factors:
• Monthly living expenses
• Regular income, such as National Pension benefits, retirement pensions, and rental income
• Current allocations to cash, bonds, and stocks
• Whether the market is rising or declining
• Taxes and trading fees
• Large expenses expected in the near future
• Remaining retirement horizon
• Level of investment risk you can tolerate
Because these circumstances vary by individual and change over time, there is no single withdrawal order that applies equally to every retiree.
Asset Withdrawal Order and Account Withdrawal Order Are Different
When planning retirement withdrawals, you must distinguish between which asset to use and which account to withdraw from.
The asset withdrawal order determines whether you will use or sell cash, deposits, bonds, stocks, or ETFs.
The account withdrawal order determines whether you will withdraw from a taxable investment account, retirement account, tax-exempt account, or another tax-advantaged account.
For example, you could sell stocks held in a taxable investment account or sell stock-based investments within a retirement account. Even when the asset is the same, the timing of taxation, applicable tax rate, withdrawal restrictions, and fees may differ by account type.
Because tax laws and retirement withdrawal rules vary by country and account type, you cannot assume that one particular account should always be used first.
First determine which asset should be used, identify the account in which it is held, and then compare the taxes and withdrawal conditions.
Three Ways to Establish a Retirement Withdrawal Order
Method 1. Use Cash First and Bonds and Stocks Later
The simplest approach is to use cash-equivalent assets first, followed by bonds as the cash balance declines, and then stocks.
This approach can help you avoid immediately selling assets whose market prices have fallen. It may also provide peace of mind if you have already secured the money needed for near-term living expenses.
However, continually using only cash may reduce the cash allocation too much. If the market later declines or an unexpected expense arises, you may be forced to sell stocks or bonds at an unfavorable time.
Holding too much cash that earns less than inflation, or using cash first for an extended period, may also change the purchasing power and asset allocation of your retirement portfolio.
Therefore, using all your cash before touching other assets is a simple method, but it is not appropriate in every situation.
Method 2. Withdraw Proportionally from All Assets
The second method is to withdraw proportionally from cash, bonds, and stocks according to their current allocations.
For example, if your portfolio consists of 10% cash, 35% bonds, and 55% stocks and you need to withdraw KRW 10 million, you would use KRW 1 million in cash, KRW 3.5 million in bonds, and KRW 5.5 million in stocks.
This method makes it relatively easy to maintain a similar asset allocation after the withdrawal.
However, it may require you to sell a predetermined portion of stocks even during a year when the market has fallen sharply. More frequent transactions may also increase taxes and fees.
Proportional withdrawals should not be applied mechanically without considering market conditions and costs.
Method 3. Use Assets That Are Above Their Target Allocations First
The third method is to cover living expenses with assets that have risen above their target allocations.
If a market rise increases your stock allocation from its 55% target to 63%, you can sell part of the stock allocation to cover living expenses while also reducing its portfolio weight.
This withdrawal method combines two tasks— retirement portfolio rebalancing—and living-expense withdrawals.
Conversely, if a sharp market decline pushes the stock allocation below its target, you may first consider other sources, such as cash, matured deposits, or bond interest.
However, another method may be more appropriate if selling an overweight asset would result in substantial taxes, early termination costs, or trading fees.
Using assets that are above their target allocations may help manage the portfolio, but it does not guarantee returns or prevent losses.
Five Steps for Establishing a Retirement Withdrawal Order
Step 1. Calculate the Actual Living-Expense Shortfall
First, subtract your regular income from the total amount needed for one year of living expenses.
Net withdrawal requirement = Annual living expenses − Regular income from pensions, rent, interest, and other sources
For example, if your annual living expenses are KRW 36 million and you receive KRW 24 million from National Pension benefits, retirement pensions, and other regular income, you must withdraw KRW 12 million from your investment assets.
When reviewing your annual withdrawal amount, one commonly referenced guideline is— the 4% retirement withdrawal rule—but it should not be applied uniformly to everyone.
The amount you can safely withdraw may vary according to your retirement horizon, regular income, inflation, taxes, medical expenses, and market conditions.
Do not calculate monthly living expenses alone. Include irregular expenses such as property taxes, insurance premiums, vehicle repairs, medical expenses, and travel costs in your annual estimate.
Step 2. Separate the Money Needed in the Near Future
Identify the living expenses and large anticipated costs that must be paid within the next year.
If all this money is invested in volatile stocks, you may be forced to sell at a loss during a market downturn.
Conversely, holding several years of living expenses entirely in cash may reduce purchasing power through inflation and leave you with insufficient long-term growth assets.
The amount reserved for near-term living expenses should reflect your retirement horizon, pension income, spending stability, health, and risk tolerance.
Living expenses held in cash or deposits cannot prevent all investment losses. Their purpose is to reduce the need to sell long-term investments urgently at an unfavorable time.
Step 3. Review Your Current Asset Allocation
Combine your cash, deposits, bonds, stocks, ETFs, and other financial assets to calculate their current allocations.
Review all accounts together because viewing retirement accounts and taxable investment accounts separately may lead you to misjudge the actual composition of your overall portfolio.
Current asset allocation = Current value of the asset ÷ Total investment assets × 100
Compare current and target allocations to identify which assets are above or below their targets.
Using an overweight asset for living expenses may reduce the need for separate rebalancing transactions.
However, you should also confirm that the target asset allocation itself remains appropriate for your current living expenses, retirement horizon, and risk tolerance.
Step 4. Compare Taxes and Costs
Even when raising the same amount of money, the amount you actually retain may vary depending on the asset and account used.
Review the following costs:
• Taxes resulting from the sale
• Taxes applied to pension withdrawals
• Trading fees
• Currency-conversion costs
• Early termination costs for deposits and financial products
• Penalties or disadvantages resulting from early withdrawals
• Interest and dividend income that will be lost after the sale
Using the account with the lowest immediate tax is not always the most advantageous approach. Future income and tax rates, pension withdrawal plans, estate plans, and the remaining investment horizon may also affect the decision.
Tax and pension rules may change, so verify the current regulations before making a large withdrawal.
Step 5. Record and Review the Asset Allocation After the Withdrawal
After withdrawing living expenses, record the remaining values and allocations of cash, bonds, and stocks.
Also record how much you withdrew from each asset and the taxes and fees incurred.
If an asset allocation moves substantially away from its target after the withdrawal, you may adjust it through additional contributions, interest, dividends, matured investments, or limited trading.
Even if you withdraw living expenses every month, you do not need to change your asset allocation monthly. Establish regular review dates and tolerance ranges to reduce unnecessary transactions.
If your regular income, living expenses, health, or family circumstances change substantially, review the target asset allocation itself instead of simply returning to an outdated target.
How to Select Withdrawal Assets Under Different Market Conditions
When the Stock Market Has Risen Sharply
If a market rise has pushed your stock allocation above its target, you may consider selling part of the stock allocation to cover living expenses.
This allows you to cover living expenses while bringing the stock allocation closer to its target.
However, selling appreciated stocks may result in taxes, so calculate the withdrawal amount, taxes, and trading costs together.
Reducing growth assets too much simply because stocks have risen may weaken the portfolio’s long-term growth potential during the rest of your retirement.
When the Stock Market Has Fallen Sharply
Especially early in retirement, one major concern is— sequence of returns risk—because market declines combined with living-expense withdrawals can significantly affect how long your retirement savings last.
If you sell a large amount of stock to cover living expenses after prices have fallen sharply, you must sell more shares at lower prices. Even if the market later recovers, the portfolio may struggle to recover because fewer shares remain.
If you have cash reserved for near-term expenses, matured deposits, bond interest, or regular income, you may consider using those sources first.
However, this does not mean that you should automatically use all your cash or bonds. Doing so may leave too little cash or push the bond allocation substantially below its target.
If the market decline continues for an extended period, consider temporarily reducing discretionary spending and adjusting the total withdrawal amount.
When Inflation Has Risen Sharply
As prices rise, more money is needed to maintain the same standard of living.
Cash has relatively low price volatility, but its purchasing power may decline when its return is lower than inflation.
Therefore, automatically increasing withdrawals at the same rate as inflation or converting all investments into cash may not be appropriate.
Separate essential expenses from discretionary spending and determine how well your regular income keeps pace with inflation before adjusting withdrawals.
If you have a long retirement horizon, also consider the need for growth assets that may help address inflation.
When a Large Unexpected Expense Occurs
A sudden large expense, such as medical bills, home repairs, or family-related costs, may be difficult to cover under your existing withdrawal plan.
First, determine how much can be covered by a separate emergency fund and insurance.
Next, compare deposits and bonds nearing maturity, assets above their target allocations, and assets with relatively low selling costs.
Selling long-term investments all at once for an urgent expense may substantially change your future living-expense plan and asset allocation.
After making a large withdrawal, recalculate whether the remaining assets can still support your retirement plan.
An Example Combining Withdrawals and Rebalancing
The following is a simplified example designed to explain the relationship between withdrawal order and rebalancing.
• Total retirement savings: KRW 212 million
• Cash: KRW 14 million
• Bonds: KRW 68 million
• Stocks: KRW 130 million
• Annual net withdrawal requirement: KRW 12 million
• Annual net withdrawal requirement: KRW 12 million
The current stock allocation is approximately 61.3%, which is higher than its 55% target. The cash and bond allocations are below their targets.
If you withdraw the entire KRW 12 million living-expense requirement from cash, only KRW 2 million in cash will remain. You may then have insufficient cash if an unexpected expense or market decline occurs.
Alternatively, raising the required money from stocks that are above their target allocation can cover living expenses while reducing the stock allocation.
For example, you could sell KRW 20 million in stocks, use KRW 12 million for living expenses, allocate KRW 2 million to bonds, and add KRW 6 million to cash.
After the withdrawal, the portfolio is worth KRW 200 million and consists of:
• Cash: KRW 20 million
• Bonds: KRW 70 million
• Stocks: KRW 110 million
The post-withdrawal allocation is 10% cash, 35% bonds, and 55% stocks, matching the target asset allocation.
This calculation is only an example intended to explain the principles of withdrawals and rebalancing. It excludes taxes, trading fees, market-price fluctuations, and whether the investments can actually be traded.
It does not mean that an allocation of 10% cash, 35% bonds, and 55% stocks is appropriate for every retiree.
Another withdrawal method may be more appropriate if selling stocks would result in substantial taxes and costs or if the target allocation no longer matches your circumstances.
Is It Safe to Cover Living Expenses with Interest and Dividends Alone?
Using interest and dividends for living expenses may help reduce the number of times you need to sell investments directly.
However, interest and dividends are not always paid at a constant rate and may be reduced or suspended depending on company performance and financial-market conditions.
Excessive concentration in high-dividend stocks or ETFs may expose you to risks concentrated in particular companies, industries, or investment strategies.
Although dividends provide cash to investors, the value of the company or fund may be affected by the distribution. Dividends should not be treated as free income entirely separate from the principal.
If interest and dividends are insufficient to cover living expenses, you must sell other assets or adjust the withdrawal amount.
Retirement assets should be managed based on total returns and risks, including interest, dividends, and price changes, rather than dividend yield alone.
Seven Common Mistakes When Establishing a Retirement Withdrawal Order
1. Using All Your Cash Before Other Assets
Following a cash-first rule without considering other factors may leave you without reserve funds during market downturns or emergencies.
Cash should be viewed as a resource for managing near-term living expenses and unexpected costs, not simply as the first asset that must be exhausted.
2. Selling a Large Amount of Stock During a Market Decline
Selling a large amount of stock after prices have declined may lock in losses and reduce the number of assets available to participate in a recovery.
Consider essential living expenses, cash-equivalent assets, regular income, and the possibility of reducing discretionary spending together.
3. Automatically Using the Account with the Lowest Immediate Tax
Exhausting one account simply because it currently has a lower tax burden may create an unfavorable income and tax structure later.
Compare account-specific taxes, withdrawal restrictions, the remaining investment horizon, and future pension income.
4. Assuming Interest and Dividends Are Unrelated to Principal
Interest and dividends are components of investment returns, and both their payments and the value of the underlying assets may change.
Increasing a particular asset excessively based only on its dividend yield may undermine diversification.
5. Failing to Combine All Accounts
Managing taxable investment accounts, retirement accounts, deposits, and cash separately may cause you to misjudge your actual asset allocation.
Before making a withdrawal, combine all accounts and financial assets to review the overall portfolio.
6. Failing to Review the Allocation After Withdrawing Living Expenses
If you use only one particular asset whenever you withdraw living expenses, the portfolio may gradually move far away from the risk level you originally planned.
Record the values and allocations of the remaining assets after each withdrawal and review them regularly.
7. Continuing to Use the Same Withdrawal Order Indefinitely
Market conditions, health, living expenses, taxes, pension income, and family circumstances may change throughout retirement.
Regularly determine whether the original withdrawal order still suits your circumstances and revise it when necessary.
Questions to Review Before Making a Withdrawal
• How much do I need for essential living expenses this month and this year?
• What is my net withdrawal requirement after pension and other regular income?
• Are there any large expenses expected within the next year?
• Is my emergency fund separate from my living-expense fund?
• What are my current allocations to cash, bonds, and stocks?
• Which assets are currently above their target allocations?
• Would I need to sell any assets during a market decline?
• Are the same assets duplicated across different accounts?
• How much tax and how many fees would result from a sale?
• Would any deposits or financial products incur early termination costs?
• Will I still have enough money for near-term living expenses after the withdrawal?
• Can I tolerate the portfolio’s risk level after the withdrawal?
• Can I temporarily reduce discretionary spending?
• When is my next portfolio review?
Following a fixed cash, bond, and stock order without answering these questions may make it difficult to maintain your retirement plan as markets and living expenses change.
Should You Use Cash, Bonds, or Stocks First?
There is no single asset among cash, bonds, and stocks that should always be used first.
If you lack sufficient funds for near-term living expenses, securing cash-equivalent assets may be the priority. If stocks are above their target allocation, you may use part of the stock allocation for living expenses while realigning the portfolio.
If the market has fallen sharply, first review your cash, regular income, matured investments, and ability to adjust discretionary spending. This may reduce the need to sell depressed stocks urgently.
However, automatically preserving cash and bonds or using them up first is not necessarily appropriate. Also consider the post-withdrawal allocation, protection against inflation, taxes, and costs.
Ultimately, select the withdrawal asset by considering whether it is above its target allocation, whether near-term living expenses are sufficiently funded, how much it will cost to sell, and whether the post-withdrawal risk level remains appropriate.
ConclusionConclusion
A retirement withdrawal order is not a simple rule that requires you to choose cash, bonds, or stocks and continue using them in the same sequence.
First, calculate your net withdrawal requirement by subtracting regular income from annual living expenses. Then separate near-term spending money from your emergency fund.
Next, combine the assets in all accounts, review their current allocations, and compare overweight assets, market conditions, taxes, and trading costs.
Coordinating living-expense withdrawals with rebalancing may help reduce unnecessary transactions and manage the portfolio’s risk level.
What matters is not predicting the market’s direction. It is regularly reviewing the portfolio so that you can cover living expenses reliably while managing the remaining retirement savings according to your plan and risk tolerance.
This article provides general financial information and does not recommend any particular asset, account, or withdrawal order. Actual withdrawal decisions may vary according to an individual’s financial circumstances, taxes, investment horizon, country-specific regulations, and risk tolerance.
References
FINRA, Managing Your Retirement Portfolio
Investor.gov, Is It Time to Rebalance Your Investment Portfolio?
U.S. Department of Labor, Taking the Mystery Out of Retirement Planning
전국투자자교육협의회, 연금 부자 레시피: 은퇴 파산을 피할 수 있는 안전한 노후 자금 인출 전략