How the Money Gears Spin the Other Way

During a workshop I held last winter, we went around the circle sharing one thing that had always eluded us about money. This exercise is great because there's no shortage of confusing money concepts, and thanks to the tangle of our financial system, the hard part is picking just one.

One participant closed her eyes, raised her chin, and said, "I know this seems simple, but I can't wrap my head around how I actually take out my money in retirement. Like — what does that even look like?"

I love this question, because it's such a valid one. We spend our entire working lives learning that we need to save, how much to save, where to put it. Almost no one teaches us what happens when it's time to reverse course and actually spend what we've built.

I've been thinking about this because I'm reversing that course myself.

Spending Money to Make Money

We're in the process of selling a home we used to live in, one we held onto for two years after moving, partly as a safety net, partly because we weren't ready to let go. In hindsight, we should have sold it two years ago. But you can't time the market, so here we are, selling for less than we'd hoped.

Getting it ready wasn't cheap. After updates, many grounds cleanups, and staging, it sat for months without an offer. We've spent over $40K preparing the home and dropped the price by $200K. As a rental business owner, it's painful watching an asset sit vacant, losing value. But as a business owner, I also know you sometimes have to spend money to make it — and as an investor, I know when it's time to cut losses. We'd rather sell this season than gamble on a slow winter market.

What This Means for Our Day-to-Day Finances

We're in early retirement, living off a fairly consistent monthly spending target, and this sale has blown right through it. Our rental income dipped when we lost a tenant in the home we're selling, and we've needed cash to fund the sale itself. So for the first time in a while, we're pulling from savings.

That sentence usually sounds alarming. For us, right now, it's expected. This is what the savings are for. And it's given us a chance to make some intentional moves: rebalancing toward our target allocation, and checking off tax strategies we'd been meaning to tackle for a while.

What It Actually Means to "Pull From Savings"

(To be clear: these are examples, not advice.) People draw down savings in a few common ways:

• Tap cash set aside in emergency savings

• Take distributions from retirement accounts, including Required Minimum Distributions (RMDs)

• Direct brokerage dividends into a bank account rather than reinvest them

• Collect interest income from bonds or CDs

• Sell shares or funds in a taxable brokerage account

When I say "distribute" or "withdraw," I mean move money from an account where it's growing into one you can actually spend from. Say, selling shares in a retirement account and transferring the cash to checking. This isn't a move to make on a whim; taxes and penalties can be steep if the timing or account type is wrong.

In our case, we chose to sell funds from our brokerage account, based on two things:

We're in an unusually low tax bracket this year, thanks to carryover losses, depreciation, and lower business income during a year of transition.

We've been overweight in a mid-cap index fund I've wanted to trim for a while.

I knew exactly how much room we had before our long-term capital gains rate jumped from 0% to 15%: $98,900. Anything above that, and we'd owe tax on the gains.

We don't expect to be in a 0% capital gains bracket again anytime soon, so this was the year to sell a fund that's appreciated significantly. Normally this a great problem to have, except it usually comes with a bigger tax bill. This year, we got to unload that gain essentially tax-free.

Down the road, when we're likely in a higher bracket, the calculus flips: we'll probably sell the funds with the highest cost basis and lowest appreciation, and leave the most appreciated assets to our kids or favorite charities instead — a different way of managing that future tax burden.

If we were 73 or older and subject to RMDs, we'd exhaust that RMD amount first before touching anything else. There's a lot more strategy under the hood than I'm laying out here, but the big picture is: we spend our working years filling a set of buckets, and eventually, it's time to start draining them.

Draining Is the Goal

"Draining" sounds scary, but remember: this is what we save for all along. It's the payoff we started building toward with our first 401(k) contribution, or the first $.23 change we rounded up into a savings account.

It can feel abstract because we're so unused to practicing it. But in reality, it's straightforward: choose the bucket that fits your situation, choose the fund within it, sell it, move the cash, spend it.

Getting the gears of our financial lives moving in one direction (toward saving) is a heavy, decades-long lift. Turning the gears the other way is mechanically simpler, but for most of us, we've literally never turned the lever that direction. It's no wonder why this seemingly simple concept can feel so abstract.