The Next Paycheck

From employer paycheck to self-driven income

Of all the aspects of retirement to prepare for, money was the one I felt I had most under control.   For over 10 years, I followed my plan – downsized to a smaller house, paid it off, maxed out my 401K.  I was ready.  But you’re never quite as prepared as you think you are.  The devil is in the details.

We all know as retirement approaches there are so many financial decisions to make: keep the 401K or roll it into an IRA; take Social Security sooner or later; hire a financial advisor or manage my own money.  The list goes on.  And as an early retiree, add: how to manage healthcare before I reach Medicare age.  My goal was to create my own paycheck from my retirement accounts to cover my regular monthly expenses.

When the day arrived, I had what I thought was a pretty well thought out plan.  I had a small sum in a Roth 401K, enough to live off for the 4 years before I qualified for Medicare (keeping my taxable income low enough to get some ACA tax credits).  That would give my traditional retirement account a few more years to grow before I started withdrawing from it. 

I immediately set out to roll my 401Ks (Traditional and Roth) into IRAs, because an IRA would allow me more freedom in how I took withdrawals – the 401K was a bit rigid.   As I started that process, I quickly got two surprises: 1) the rollover process is not a risk-free proposal, and 2) that new Roth IRA wasn’t quite as flexible as I thought.

The rollover process was pretty straightforward.  My accounts were liquidated and two checks were sent to my new broker where the IRA’s were to be maintained, one for the Traditional 401K balance and the other for the Roth IRA.  So, I’m cashed out of my 401K, and then, a week to 10 days later, the cash is deposited into my IRA’s and from there I could purchase my investments in each. 

I had three ETFs in mind to purchase, but during the week-long waiting period after I’d sold my 401K investments, their prices quickly rose.  I felt like I had lost thousands of dollars to the market movement in that week – it was an uncomfortable reminder of timing risk, and not the way I hoped to begin my post-retirement financial life.  But I went ahead and bought, remembering the old adage, it’s time IN the market that matters, not timING.  That turned out to be the right thing to do, because if I had waited for those prices to come down, I’d still be waiting 9 months later.

As I’d intended my retirement “paycheck” to start with withdrawals from the Roth IRA in the near feature, I put all of that in cash or cash-like investments.  My surprise here was finding that withdrawals from IRA can only be made after 5 years of the IRA being opened (didn’t matter that the Roth 401K was older than 5 years).  Wait, I’d planned to use that money right away!  Luckily, a little further research reminded me that contributions could be withdrawn at any time, and my Roth 401K balance was 80% contributions.  The closeout statement of my Roth 401K clearly stated what my basis was, and I have that as proof that my withdrawals are only using contributions should the IRS ever ask.  I just had to adjust the amount down a bit, and use savings for the difference.

None of these hiccups derailed my plans, but they did reset my expectations. Retirement money doesn’t offer certainty — it demands attention. Security now comes less from guarantees and more from understanding my own numbers and being willing to adjust. The paycheck didn’t disappear; it changed form. And so did my role in managing it.