Drawing an Income
The years between the last salary and the first pension
Stopping work rarely coincides with every income source starting. The gap years have their own arithmetic and are routinely overlooked.
The points below about bridging the years before a pension starts are ordered by how much difference they make, not by how often they get repeated.
What matters most
- Access ages differ by source and have been raised in several countries.
- The withdrawal rate during the gap is unusually high and temporary.
- Money needed within a few years does not belong in growth assets.
The gap exists more often than plans admit
State pensions, workplace schemes and private arrangements each have their own earliest access age, and these rarely coincide. Anybody stopping work before the earliest of them has to fund the entire interval from accessible savings.
Those ages are set by legislation and scheme rules and have been raised in several countries over recent decades. A plan built around an access age that later moves creates a gap that simply did not exist when it was written. Checking the current rules rather than the ones that applied when you started is a genuine annual review item.
Why the gap years are demanding
The entire spending requirement falls on one source, which makes the withdrawal rate during those years unusually high. That elevated rate is temporary, which changes how it should be assessed compared with a permanent withdrawal rate. A poor market during the gap has an outsized effect, because a large proportion of the pot is drawn in a short period.
This is a concentrated version of sequence risk with a known start date and a known end date attached. Planning the gap separately from the rest of retirement gives a clearer picture than averaging across the whole span.
Where the money for it should sit
Money needed within a few years has a short horizon and does not belong in growth assets, whatever the rest of the portfolio does. A separate reserve covering the gap removes any need to sell into whatever conditions happen to prevail at the time. Building that reserve during the years before stopping work is considerably easier than assembling it afterwards.
Where it helps most, the reserve also keeps the decision to stop work reversible for longer, which is worth something in itself. Where accessible savings fall short, the honest options are working longer, spending less or moving the stop date.
Access rules are jurisdictional and they change
Which accounts can be drawn at what age, and on what terms, differs completely from one country to another. Some systems allow phased access and others do not, while some impose penalties for drawing anything early. Transferring or consolidating accounts can change access ages in ways that are not obvious at the time of the transfer.
Protected early access ages exist in some schemes and are lost on transfer, which is a costly detail to discover afterwards. This is an area where taking local regulated advice before acting is genuinely worth what it costs.
Part-time work in the gap
Reducing hours rather than stopping outright shortens the gap and lowers the amount that must come from savings. Even modest earnings during those years cut the withdrawal rate substantially, because they act on the most demanding period.
Continued work may also maintain access to benefits and cover that would otherwise have to be bought separately. The interaction with pension and benefit rules varies by country and is frequently counterintuitive in its details. Because those interactions are jurisdictional, the arithmetic has to be done against your own system rather than a general description.
Testing the plan
Write down each income source, the age it starts and the amount, then mark the years where the total falls short. The shortfall in those years, multiplied by their number, is the size of the bridge you actually need to build. Add a margin, because access ages may move again and early retirement spending is frequently higher than planned.
On an ordinary week, reviewing this annually in the run-up catches rule changes while there is still time to respond to them. A plan that survives the gap years usually survives the rest, because those years are the most demanding part of it.
Everything above, in order of what to do first
- The gap exists more often than plans admit. State pensions, workplace schemes and private arrangements each have their own earliest access age, and these rarely coincide.
- Why the gap years are demanding. The entire spending requirement falls on one source, which makes the withdrawal rate during those years unusually high.
- Where the money for it should sit. Money needed within a few years has a short horizon and does not belong in growth assets, whatever the rest of the portfolio does.
- Access rules are jurisdictional and they change. Which accounts can be drawn at what age, and on what terms, differs completely from one country to another.
- Part-time work in the gap. Reducing hours rather than stopping outright shortens the gap and lowers the amount that must come from savings.
- Testing the plan. Write down each income source, the age it starts and the amount, then mark the years where the total falls short.
The takeaway
The gap years are the most demanding part of the plan. Fund them separately and the rest gets easier.
Small and repeatable beats ambitious and abandoned, almost every time.
Questions readers ask
What if my access age changes after I have planned around it?
It has happened in several countries. Reviewing the current rules annually in the run-up is the only reliable way to catch it while there is time to react.
Where should bridge money be held?
Money needed within a few years has a short horizon, so it generally belongs somewhere that will not have fallen when you need it.
