5 Retirement Withdrawal Strategies to Maximize Your Runway in Retirement

Retirement planning is a complex and lengthy process, but there are common retirement withdrawal strategies you can consider using.

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Transitioning to retirement is a major milestone, one that may be accompanied by a whirlwind of emotions and questions. As you approach retirement, you may be wondering if your savings are enough to support your retirement. With no more regular paychecks coming, you’ll need to rely on your retirement investments instead. The good news is that you have plenty of withdrawal investment strategies to choose from to maximize your funds. However, deciding which strategy to use may be complicated.

Key Takeaways

  • Common retirement withdrawal strategies include the 4% rule, withdrawal buckets, dynamic withdrawals, and more.
  • When planning for retirement, other factors to consider to ensure you have enough money include your tax obligations, portfolio diversification, life expectancy, and additional income sources.

5 Retirement Withdrawal Strategies to Consider

A big part of retirement investing is deciding which retirement withdrawal strategy to use and how it will affect your savings and runway. Here are 5 options to consider.

1. The 4% Rule 

One of the most common retirement withdrawal strategies is the 4% rule. Under the 4% rule, you would withdraw 4% of your investment account balance in your first year of retirement. Each subsequent year, you’ll adjust the amount you draw from your accounts to keep up with inflation, or the rising costs of goods and services.

For example, if you have a nest egg of $1 million, you would withdraw $40,000 during your first year in retirement. If inflation is at 2% (the Federal Reserve’s target rate), you would withdraw $40,800 the second year ($40,000 x 1.02) and $41,616 ($40,800 x 1.02) the third year.

The goal of the 4% rule is to ensure your money lasts for at least 30 years, though in many cases, the funds may last for 50 years or more, depending on your asset allocation and the size of your nest egg. A study by financial advisor William Bengen found that not having enough stocks in your portfolio can compromise the longevity of your funds.

The 4% rule is simple and predictable, allowing you to keep up with inflation (or deflation). But, it does not account for rising interest rates and market volatility. It assumes a rigid withdrawal rate and doesn’t provide the flexibility to adjust the strategy based on market performance. If you retire during a recession, when the stock market has significantly declined, you risk using up all your savings early.

Additionally, the 4% rule does not factor in changes to your spending habits. You may not need to draw as much money during certain years if you have fewer expenses. Or, in other years, you may need more money to cover unexpected medical bills or home improvement projects. Thus, it’s best to use the 4% rule as a guideline rather than a one-size-fits-all solution to your retirement.

2. Fixed-Dollar Withdrawals

With fixed-dollar withdrawals, instead of withdrawing a percentage of your investment accounts every year, you would take the same amount of money out for a set period. For example, you might withdraw $50,000 annually for the first 5 years of retirement and then reassess the dollar amount at the end of the 5 years.

One of the main benefits of this strategy is that you’ll have a predictable annual income, which helps you budget accordingly. However, like the 4% rule, a fixed-dollar withdrawals strategy does not consider inflation and changes in the market. If you do not increase your withdrawal amount when the economy experiences inflation, you risk losing buying power over time.

Alternatively, if you set your fixed-dollar amount too high, you could run out of money early. If your investments lose value during a declining market, you may need to sell more of your assets to get the same dollar amount, which could erode your portfolio’s value faster.

3. Withdrawal Bucket Strategy 

The withdrawal bucket strategy involves splitting your assets into 3 “buckets.” The first bucket holds a percentage of your savings in cash for immediate use, typically 3 to 5 years of living expenses. The second bucket holds another couple of years of living expenses in fixed-income investments, such as bonds, treasury notes, and certificates of deposits (CDs). The third bucket holds your remaining investments in equities, such as stocks and commodities.

As you use up the cash from the first bucket, you’ll refill it by selling some of your fixed-income investments or equities. By setting aside a few years of living expenses, your investments should have more time to grow while giving you greater control over your assets. This process also helps you avoid selling your investments at a loss during emergencies since you’ll have plenty of cash on hand.

While this approach takes more time to plan, it reduces the chance of you running out of money. But, if you miscalculate how much money to hold in each asset and the time horizon for each bucket, that can make your strategy less effective. Additionally, you’ll still need to budget accordingly to figure out how much you can reasonably afford to spend each year.

4. Fixed-Percentage Withdrawals

With a fixed-percentage withdrawal approach, you would withdraw a fixed percentage of your investment portfolio each year. For example, you can take out 3% or 4% of your total investments annually. This method differs from the 4% rule or fixed-dollar withdrawal strategy because you can choose a different percentage of your account balance to withdraw aside from 4%, and the dollar amount varies as your investment balance rises and falls from market fluctuations.

One of the main benefits of this approach is that it naturally adjusts how much you withdraw to respond to changes in the market. While it creates some uncertainty, if you choose to withdraw funds at a percentage below the anticipated rate of return for your investments, your assets could continue growing in value even though you are taking money out.

But, on the other hand, if your withdrawal percentage is too high, you risk running out of money early. Your income may also change over the years as the pool of money you are drawing from changes. This can affect your ability to plan ahead, and you may not get a consistent annual income.

5. Systematic Withdrawals

In a systematic withdrawal plan, you only withdraw the income generated by your investments, such as dividends or interest. Because your principal investment remains untouched, you will not run out of money during retirement. Meanwhile, your investments will continue to grow in value.

However, this strategy only works if you have a significant amount of money saved since the income from your investments needs to be enough to support your lifestyle. Your funds will also vary in any given year since market performance can impact how much money you receive. During market downturns, you may not be able to withdraw as much money as you’d like, resulting in unpredictable income. There is also the risk that the income you can withdraw fails to keep up with inflation.

4 Four Factors That Will Impact Your Withdrawal Strategy 

1. Taxes 

Once you start drawing money from your retirement accounts and other investment accounts, you may owe taxes on the capital gains from selling your assets. If you are taking funds out of your traditional IRA or 401(k), you’ll owe income tax on the money. But, withdrawals from Roth IRAs are generally tax-free since you’ve already paid taxes on your contributions. Additionally, if you have Social Security benefits or pension or annuity payments, you may also owe taxes on those.

As you budget for retirement, it’s crucial to consider how much you’ll need to pay in taxes every year. That way, you can budget accordingly and have the money ready when it’s time to pay the taxes owed. You should also look into the required minimum distributions for your retirement accounts. For certain retirement funds, such as an individual retirement account (IRA) and a 401(k), you need to start taking withdrawals once you turn 72.

2. Portfolio Diversification 

To spread risk across your investments and get the most out of your money, you should hold different assets in your portfolio. For example, you may want to have a mix of cash, stocks, bonds, and real estate to ensure that you don’t put yourself in a position where one single investment can significantly hurt your portfolio. For example, I invest in a mix of individual stocks, index funds, bonds, and crypto, but I also have a high-yield savings account with Marcus by Goldman Sachs.

3. Social Security and Pension Benefits

You can start receiving your Social Security benefits at age 62, but your full benefits only kick in when you turn 67 (for those born in 1960 or later). If you begin taking your benefits early, your monthly benefit amount will be lower. But, if you wait until your full retirement age, you should receive 100% of your Social Security retirement benefits.

If you choose to delay your benefits, you can get increased benefits up to age 70. After that, your benefits will stop increasing even if you are not receiving them. If you are eligible for a pension, you’ll need to factor in when to start taking your pension, how much to withhold in taxes, and the type of survivorship option you’d want. Additionally, you should figure out how to maximize your pension payouts since that will affect your retirement income.

4. Life Expectancy  

One of the hardest retirement factors to determine is how long you will live. According to the CDC, the average life expectancy at birth for males is 73.5 years and 79.3 years for females. However, with life expectancy continuing to grow, if you retire at 65, there’s a chance you may need to stretch your retirement savings out 20 or 30 years. You’ll also need to factor in healthcare costs, which may increase as you age.

The Bottom Line

Figuring out retirement withdrawals is a complex process that needs to factor in your financial goals, tax impact, and account structures. Whether you decide to set your own withdrawal rules or use one of the options we discussed, it’s best to consult with a financial advisor or financial planner to figure out the best course of action for you.

We are not financial advisors. The content on this website and our YouTube videos are for educational purposes only and merely cite our own personal opinions. In order to make the best financial decision that suits your own needs, you must conduct your own research and seek the advice of a licensed financial advisor if necessary. Know that all investments involve some form of risk and there is no guarantee that you will be successful in making, saving, or investing money; nor is there any guarantee that you won't experience any loss when investing. Always remember to make smart decisions and do your own research!

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