Key takeaways

  • A strategy for withdrawing from IRAs, 401(k)s and other investment accounts is a key part of your retirement income planning and can help ensure you have enough money to meet your needs throughout retirement.

  • Common withdrawal strategies include the 4% rule, the bucket strategy, proportional withdrawals and dynamic withdrawals.

  • Taxes, life expectancy, and additional income sources should be factored into your withdrawal strategy.

As you approach retirement, you may have questions about the money you’ve saved over your working life: Will it be enough? Will it afford you all the opportunities you hope to have, such as traveling and spending more time with loved ones?

Yet there’s another important question to consider: How will you strategically withdraw funds from your retirement and investment accounts to ensure peace of mind in this next new chapter? To answer this question, you’ll need to choose a retirement withdrawal strategy.


What is a retirement withdrawal strategy?

A retirement withdrawal strategy serves as a roadmap for how to access and spend your retirement funds to meet your unique goals and needs.

Retirement planning involves more than just setting up accounts and making contributions. You need to consider how you’ll approach retirement account withdrawals to maintain the lifestyle you desire without running out of money—or into any unforeseen tax issues.

Planning for this financial transition is one that can be jarring for most people, no matter their income, because most of us have received a paycheck every week or two for our whole adult lives. When you retire and no longer have a steady income from a paycheck, you need to approach paying for day-to-day expenses and larger purchases differently.

Having a withdrawal strategy in place that aligns with your investment and tax strategies can help you get the most from your retirement savings — and may even help minimize your tax burden. Knowing you have a plan for accessing your retirement funds can also reduce stress and let you fully enjoy your retirement years.


Four retirement withdrawal strategies to consider

There isn’t a universal approach to retirement withdrawals. Deciding which strategy is best for you will involve weighing how different factors may affect your specific goals and needs.

Here are four common retirement withdrawal strategies to consider.

1. The 4% rule for retirement

The 4% rule is perhaps the most common of all retirement withdrawal strategies. Using this strategy, you withdraw 4% of your savings in the first year of retirement. In each year that follows, you use 4% as a baseline and scale the amount to account for inflation. The 4% rule is a popular approach, because it works in most markets for most people and is straightforward to understand and accomplish.

However, while the 4% method is popular for its ease of use, this can potentially be a drawback if there are other factors that require you to have a more customized withdrawal plan. It’s generally based around a 30-year retirement window, so if you have a longer or shorter window, it will affect your ability to take more or less than 4%.

Another thing to note is that the 4% method is usually run on either a 60/40 equity and fixed income split, or a 50/50 split. So, if your retirement fund is all in cash and you’re 55 and retired, this method may not provide enough funds to last your entire retirement.

2. The retirement bucket strategy

The retirement bucket strategy divides your savings into different “buckets” based on different timeframes. A short-term bucket holds easily accessible cash for immediate needs, while a long-term bucket keeps growth investments for later years.

The money you use for those first few years might be in certificates of deposit (CDs), treasury notes or municipal bonds, while your longer-term savings remains in your retirement investment accounts.

This method is straightforward, and it can provide some peace of mind since you’ll have cash on hand and won’t need to sell off stocks or tap into another account in the event of an emergency.

However, using this method could potentially hinder your investments’ growth, since you’ll have three to five years of expenses in cash instead of in investment accounts.

3. Proportional withdrawals

The proportional withdrawal strategy involves drawing proportionally from taxable accounts and tax-deferred accounts first, and then Roth accounts. The goal of this method is to spread out and reduce the tax impact on your withdrawals.

The old advice was to take everything from taxable accounts first, then tax deferred and then tax exempt, so you could capitalize on tax-deferred growth. Today, if you have considerable assets and don’t take any money out of your IRA for years, once you hit 73 and have to take required minimum distributions, you may have actually pushed yourself into a new tax bracket due to the large balance that you’ll have to pay additional taxes on.

The proportional withdrawal strategy can help you avoid this issue, but it requires more customization. You would need to examine all your accounts and speak with your tax and financial professionals to make sure you’re withdrawing the optimal investments to limit your tax exposure now.

Plus, with future tax rates unknown, you won’t know what the tax rates will be when you start taking your required minimum distributions. Seeking professional guidance can help you ensure you’re making the most of your retirement assets with this strategy.

4. Dynamic withdrawals

The dynamic spending or dynamic withdrawal approach, sometimes referred to as the “Guardrails” strategy, is a flexible method that allows you to adjust your withdrawals based on market conditions and your specific spending needs.

With this strategy, you start by setting a target withdrawal rate, which is the amount of money you plan to take out of your investments each year. You also set a high and low guardrail, which are limits on how much you can withdraw each year. If your actual withdrawal rate is above the high guardrail, you start to reduce the amount you withdraw; if your rate is below the low guardrail, you can increase the amount you withdraw.

In general, this method may be suitable for higher net worth individuals with larger buckets of discretionary income, because it may not result in a steady stream of income depending on what the market is doing. If it’s up, you may have a bit more discretionary income, but if it’s down, you may have to cut down on spending.

Since this method requires closely watching market conditions, inflation and taxation, you should consult both your tax and financial professional who can help you monitor your positions and rebalance your portfolio if needed.

A retirement withdrawal strategy can be as simple or complex as you like, but it should consider your specific needs and goals to ensure you make the most of your money. 

Other factors to consider when taking retirement withdrawals

Now that you know a little more about common retirement withdrawal methods, don’t forget about these additional factors before choosing the best one for you.

1. Life expectancy

According to the Social Security Administration, the average life expectancy for a man who is 65 years old today is 84 years; the average life expectancy for a woman is 86.6 years.1

This means that if you retire at age 65, there’s a possibility you’ll need to stretch your retirement savings 20 or even 30 years or more. Aside from general living expenses and taxes, you’ll also need to take healthcare costs into consideration, including the potential for long-term care needs. Speaking with a financial professional can help you plan for a variety of possibilities and ensure you leave yourself plenty of wiggle room.

2. Taxes

Many retirees will likely owe taxes on their Social Security benefits, and some may owe taxes on their pension or annuity payments. When you’re budgeting for retirement, it’s important to consider how much you’ll pay annually in taxes so that you have the money available when the time comes. Unlike during your career, these taxes will not be automatically withheld from your paycheck.

You may also owe taxes on the money you withdraw from your retirement savings accounts. Figuring out how to make tax-savvy withdrawals can be challenging, especially when drawing from multiple accounts with unique tax implications. Again, seeking tax advice from a tax specialist can help you navigate these waters.

3. Social security and pension benefits

The full retirement age for Social Security benefits is 67 for those born in 1960 or later. The earliest you can begin taking benefits is age 62, but your monthly benefit amount will be reduced. If you wait until your full retirement age to collect Social Security benefits, you should receive 100% of your monthly benefit. And if you continue to delay your benefits past your full retirement age, you can receive increased benefits until you reach age 70, at which point your benefits stop increasing even if you continue to not take them.


Frequently asked questions about retirement withdrawals

How can I minimize taxes on retirement withdrawals?

Understanding how to do this is something that may require professional consultation. You must consider each source of income at the account level and comprehensively understand the tax implications of your overall plan.

Consulting with a financial professional can help minimize the tax burden you’ll face in retirement, ensuring you’re making the most out of your savings.

How can I minimize risk on retirement withdrawals?

There are ways to minimize risk by aligning your assets with different spending needs. Many people line up essential expenses like housing, food, shelter and basic utilities with Social Security income — and more discretionary funds with investments.

Having a diversified portfolio with different options for investments can also help minimize risk. Ensuring you have a variety of income sources in your portfolio—such as stocks, CDs, municipal bonds, etc.—can help you weather any market volatility and retain peace of mind during your retirement.

How do required minimum distributions affect my withdrawal strategy?

RMDs require you to withdraw a portion of your tax-deferred IRAs or 401(k)s once you reach the age of 73 and pay ordinary income tax when withdrawn.

It’s important to plan now for how you’ll handle RMDs in the future and how they fit into your withdrawal strategy. If you have a significant balance in your account, it’s possible that future RMDs will trigger a higher tax bill, because you enter a higher bracket than you would if you had taken withdrawals earlier. It’s also possible that you may be taking more than you need to take out, and in that case, you may end up reinvesting in a taxable account. Or, if RMDs don’t cover all your expenses, you need to supplement it with other accounts.

Why is asset consolidation important for retirement withdrawals?

A key part of your retirement withdrawal planning may include asset consolidation, no matter what strategy you go with.

Especially in retirement, when you may be taking withdrawals from multiple places, it’s likely going to be easier to track and rebalance comprehensively across your portfolio and administer those withdrawals if your assets are consolidated.


Selecting your retirement withdrawal strategy

A retirement withdrawal strategy can be as simple or complex as you like, but it should consider your specific needs and goals to ensure you make the most of your money. Consulting with a financial professional can help you maximize your retirement income and plan thoughtfully for your future.

It’s also a smart idea to review your retirement plans — including your withdrawal strategy — annually to make sure they still align with your values and long-term goals. With some thoughtful strategizing now, you can ensure peace of mind throughout your retirement years.

Learn how we can help you plan and create your retirement income strategy.

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