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 and dynamic withdrawals.

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

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

There’s another important question: How will you withdraw funds from individual retirement accounts (IRAs), 401(k)s and other investment accounts to meet your needs and ensure you don’t outlive it?


Three withdrawal strategies to consider

A key part of retirement planning is deciding which withdrawal strategy is the best for your specific situation and how different factors will impact your savings. Here are three options to consider.

1. The 4% rule

Maybe the most common of all retirement withdrawal strategies, the 4% rule calls for a person to withdraw 4% of their savings in the first year of retirement. In each year that follows, they will continue to withdraw 4%, making sure to scale appropriately to account for inflation. This method may be considered safe for someone who hopes to keep income flowing throughout retirement.

While the 4% rule may seem standard in the financial industry, it’s simply a guideline and not a one-size-fits-all solution.

2. Bucket strategy

The bucket strategy consists of splitting your savings into different accounts based on your expenses. For example, you might keep a few months’ worth of emergency savings in a savings account along with living expenses for a year. You could keep another couple years’ worth of living expenses stored in fixed-income investments, such as certificates of deposit, treasury notes and municipal bonds. From there, you could retain the rest of your long-term savings in your retirement or investment accounts.

This strategy may have less risk because 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.

3. Dynamic withdrawals

Unlike the 4% rule, dynamic withdrawals allow you to change how much you take out of your accounts each year, with an annual spending floor and ceiling to help you stay within an appropriate range. This allows you to adjust for market fluctuations, withdrawing more in years when your investment returns are higher.

Since you can take out less money if you need to, this approach can help ensure your savings last the length of your retirement.

When choosing a withdrawal strategy, it’s important to take factors such as taxes, life expectancy, additional income sources and your investment portfolio into consideration.

Four factors that will impact your withdrawal strategy

When choosing a withdrawal strategy, it’s important to take factors such as taxes, life expectancy, additional income sources and your investment portfolio into consideration. These factors can influence your savings, so the earlier you plan for them, the more flexibility you’ll have during retirement.

1. 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.

  • If you’re withdrawing from a traditional 401(k) or IRA, you will owe income tax on that money.
  • Withdrawals from a Roth 401(k) or Roth IRA are generally tax free, as you’ve already paid taxes on your contributions.
  • If you have both traditional and Roth retirement plans, you may consider making withdrawals from taxable accounts first and Roth accounts second (a traditional approach) or making proportionate withdrawals from both taxable and Roth accounts for a more stable annual tax impact (a proportional approach).
  • There may be potential tax penalties for taking distributions before age 59 1/2.

Your income sources will vary in retirement, and it might not be easy to keep track of the taxes you owe. Learn more about how different sources of retirement income are taxed.

2. Portfolio diversification

To help you get the most out of your funds, you should have a variety of income sources in your portfolio. The goal is to invest in interest-bearing assets and have non-correlated investments, such as stocks and bonds.

When crafting your portfolio, it’s important to consider your age and the types of things you’re investing in. You don’t want to put yourself in a position where you are relying on a few stocks, and then a drop in the market severely hurts your financial situation.

3. Social Security and pension benefits

The full retirement age for Social Security benefits is 67 years old 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.  If you’re eligible for a pension, your selection strategy is another important retirement factor. You’ll need to determine when to start taking your pension, how much to withhold in taxes, and what type of survivorship option to select. Additionally, deciding how to maximize your pension payouts – whether through a lump sum or annuities – will affect your retirement income.

With these benefits in mind, you can budget appropriately and decide how you’ll spend your additional savings.

4. Life expectancy

The toughest retirement factor to determine is how long you’ll live. 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

If you retire at age 65, there’s a possibility you’ll need to stretch your retirement savings out 20 or 30 years. Aside from general living expenses and taxes, you’ll need to take healthcare costs into consideration. As you age, these costs will increase. You may want to talk with a financial professional about the possibility of a long-term care event impacting your income later on.


Selecting your retirement withdrawal strategy

Choosing a retirement withdrawal strategy is an important decision. Be sure to consult with a financial professional about your own specific circumstances and review your financial plan at least annually in order to address any issues proactively.

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

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