A military pension that pays half your bills reduces, but does not erase, sequence of returns risk in retirement, as Edgepoint Wealth Management shows. A 1099-R arriving after a down year can show why a $60,000 traditional-account draw created more taxable income and more permanent portfolio damage than a $25,200 draw.
Sequence of returns risk is simple to say. A bad market in your first few retirement years hurts more than the same bad market later, because you're selling shares while prices are low and those shares can't recover. A pension shrinks that problem by shrinking how much you sell. It doesn't remove it.
The timing matters. The best moment to set this up is about 12 months before you leave your second career, and the rules change again when required minimum distributions start at age 73, or age 75 if you were born in 1960 or later. This article follows that calendar.
By Sarah Chen, CFP — Senior Financial Planner | Reviewed by Marcus Thompson, CFASarah has guided families through retirement transitions for over fifteen years, specializing in tax-efficient withdrawal strategies.
Before we suggest any fund change, we ask what the pension already covers. If it pays half the bills, the account only needs to fill the gap, and a $25,200 draw is a very different animal from $60,000.
Dana Whitfield, CFP® and Lead Advisor at Edgepoint Wealth Management
Lower withholding doesn't lower the tax. A traditional TSP draw is ordinary income, so we set withholding from the pension and the account draw together.
Marcus Hale, CPA and Tax Director at Edgepoint Wealth Management
12 months before leaving work, name the bill the pension will pay
Lyle and Thuy, a hypothetical couple, are 49 and 47 today. Lyle retired from the Navy as a chief, now supervises utility line crews, and plans to stop at age 57. Thuy runs a small salon. His pension pays $2,900 a month, or $34,800 a year, and it goes first against core bills. If their gross cash need is $60,000 a year, the accounts must cover $25,200. One plain rule sits under all of this: return order matters only while money is going in or out. An untouched balance ends up the same in any order.
How much account income is still needed at age 57?
At age 57, Lyle and Thuy still need $25,200 a year from their accounts: the $60,000 gross cash need minus the $34,800 pension. We size the income draw from that dollar gap, then add tax on top. A rule-of-thumb share of the $560,000 doesn't set it.
Edgepoint Wealth Management works through the same order with every client before any investment talk. We list core bills first, then subtract the pension. The account draw has to cover what's left, plus the tax on it.
Two tax points keep this honest. A draw from a traditional TSP or 401(k) is ordinary taxable income under IRS rules, the same as the pension. And paying a bill from a different account usually moves tax around in time. It rarely makes the tax disappear. Also check the IRS early-draw rules for your age and account type before you plan draws from any account.
Here's a rough threshold. If your pension and other dependable income cover at least half of core bills, test a draw based on the gap before you adopt a standard percentage of the balance. For Lyle and Thuy, $25,200 on $560,000 is 4.5 percent, while $60,000 would be about 10.7 percent.
The five steps
What the IRS does and doesn't let you shift
- List your annual core bills.
- Subtract the pension and any dependable earned income.
- Add estimated federal and state tax withholding.
- Set the annual traditional-account income draw.
- Decide where the 12 monthly payments will come from.
The first 3 market years leave Thuy a different account balance
Lyle and Thuy hold $560,000 in pre-tax accounts: Lyle's $310,000 TSP and a $250,000 401(k). Say the next three years return minus 20 percent, plus 10 percent and plus 10 percent, for illustration only. We subtract each year's draw first, then apply that year's return.
With the pension, they draw $25,200. Year 1: ($560,000 − $25,200) × 80% = $427,840. Year 2: ($427,840 − $25,200) × 110% = $442,904. Year 3: ($442,904 − $25,200) × 110% = $459,474.
Without a pension, the same couple draws $60,000 a year. Year 1: $500,000 × 80% = $400,000. Year 2: $340,000 × 110% = $374,000. Year 3: $314,000 × 110% = $345,400. The difference is $459,474 − $345,400 = $114,074.
The draws build up quickly, and the table shows why: after 3 years the pension has kept $104,400 from being pulled out of the accounts.
That $114,074 isn't a market forecast. It's the amount that could remain for Thuy or other heirs if Lyle dies, subject to beneficiary designations and account rules. No portfolio is guaranteed, and a bad start can last for years.
For this example, assume the pension and both account draws are taxable ordinary income. Set withholding from the combined picture, because a low withholding election doesn't reduce the tax owed. It just moves the bill to April. You can rerun your own numbers in our calculator.
The arithmetic, year by year
Who it matters to
If pension and other dependable income cover at least half of your core annual bills, calculate the portfolio income draw as the remaining gross cash gap, including tax withholding, before using a percentage-of-balance rule.
| Year | Running draws without pension | Running draws with pension | Running draws avoided |
|---|---|---|---|
| Year 1 | $60,000 | $25,200 | $34,800 |
| Year 2 | $120,000 | $50,400 | $69,600 |
| Year 3 | $180,000 | $75,600 | $104,400 |
What should the tax return after year 1 change?
A January 1099-R changes the conversation. Lyle opens it and sees a $60,000 distribution, in a year when the account also fell 20 percent. Part of that draw wasn't needed once the pension was counted, so it raised taxable income and sold more shares after a decline. Fewer shares remain for Thuy.
That is the moment to compare four things before touching any investment: actual pension income, income draws, withholding, and taxable account sales. A tax bill is a reason to recheck the cash-flow map. It isn't proof that one account type is always best. Edgepoint Wealth Management puts that check ahead of any fund change.
Harvesting a loss in a taxable account may reduce taxable gains under its own rules. It does not erase ordinary income from a traditional TSP or 401(k) draw.
The method has limits. It's less useful when pension income is uncertain, when core bills already exceed dependable income by a wide margin, or when you haven't set a realistic annual spending figure yet.
The January form
What a loss harvest can and can't do
| Item | With pension | Without pension |
|---|---|---|
| Annual account draw | $25,200 | $60,000 |
| Share of balance drawn in year 1 | 4.5% | 10.7% |
| Taxable income from accounts, 3 years | $75,600 | $180,000 |
| Balance after year 3 | $459,474 | $345,400 |
| Left for Thuy or heirs | Higher by $114,074 | Lower |
Years 2 through 5: keep choices open when life changes
A health event, a smaller second-career paycheck, a market decline or new tax law can each widen the household gap. Each December, list the next 12 months of bills and planned account draws. If the gap has grown, you'll see the dollar amount and which account covers it before the bill shows up.
At age 73 the required draw returns, and the question for Edgepoint Wealth Management
Required minimum distributions (RMDs) start at age 73, or age 75 for people born in 1960 or later. The IRS sets the amount, and you may take it in cash or, from an IRA, in kind by moving shares. Either way, the transfer-date value is taxable income. If your pension already covers bills, an RMD can pull out more than you spend, so look at it years ahead.
If this sounds like your household, ask Edgepoint Wealth Management one thing: "If our pension covers $34,800 of bills, what gross account draw leaves enough for taxes and a bad first market year?" Bring the pension statement, your TSP and 401(k) statements and the prior tax return. That lets us test the income draw before anyone suggests a fund change.
A pension doesn't stop a bad first year; it just means you sell far fewer shares while the market is down.
Common questions on a sequence of returns risk in retirement
My spouse would handle the bills if I died early in retirement; how should we set the account income draw?
Set the draw from the gap between core bills and dependable income, and test it with the survivor's numbers too. Check whether the pension continues to your spouse through a survivor benefit, and confirm beneficiary designations on the TSP and 401(k). A smaller draw early leaves more shares for the survivor.
Does a 1099-R from my TSP tell me whether I took too much after a market drop?
The 1099-R shows the gross amount distributed and any tax withheld, not whether it was too much. Compare that amount to your gap between bills and pension income. If you drew more than the gap plus tax, you sold extra shares and added taxable income you didn't need.
Can I keep the same annual income draw after a 20 percent decline if my pension covers our mortgage?
Sometimes, if the draw is already only the gap between bills and pension. A fixed draw is a larger share of a smaller balance after a decline, so recheck it. If the pension covers fixed bills, you may be able to trim flexible spending for a year instead.
Will an RMD force me to sell investments after a bad market year?
Not necessarily. The IRS requires the amount to leave a traditional account, but an IRA owner can take it in kind by moving shares, and the transfer-date value is taxable income. You may still choose cash from other sources for bills. The RMD amount itself still has to come out.
My adult daughter expects help with a home purchase; should that gift come from the portfolio during the first retirement years?
Usually it's safer to wait or use a smaller amount. A gift from a traditional account is ordinary income first, and it's a draw taken while returns may be poor. The IRS annual gift tax exclusion for 2026 is $19,000 per recipient, so size it against your income gap.
Primary sources
This material is general information only and does not constitute individual investment, tax, or legal advice. Investing involves risk, including the possible loss of principal. Before making any decision, talk to a financial professional, tax advisor, or attorney about your specific situation.