When planning for retirement, we often focus on the accumulation phase: saving diligently and investing wisely. We spend 40 or more years of our lives focused on building the proverbial “nest egg,” but after retirement, things change and so should our financial focus.
There are a variety of questions that must be answered. How much should you be withdrawing annually? Should you go with your IRA first or your brokerage account? Should you withdraw a fixed percentage or fixed amount? How much will you leave behind?
Having a well-planned withdrawal strategy is important:
- It helps to prolong the lifespan of your retirement savings.
- It may reduce your overall tax burden.
- It can provide a more balanced income stream.
- It can help in preserving your wealth for legacy purposes.
4 Common Withdrawal Strategies
There are a number of ways you can go about withdrawing money in retirement. As always, it helps to get advice from a trusted financial advisor, but it never hurts to educate yourself on some options beforehand. We’ve compiled a list of four below that are commonly used. Which one sounds like the best fit for you?
- The 4% Rule
You’ve probably heard of the 4% rule, a guideline suggesting that you withdraw 4% of your retirement savings in the first year of retirement, adjusting for inflation in subsequent years.1 For instance, if you have $3 million in retirement savings, you withdraw $120,000 in the first year.
This rule aims to provide a steady income while keeping the principal balance largely intact. However, it’s not one-size-fits-all. The rule doesn’t account for market volatility, interest rate trends, tax implications, unexpected expenses, or changing personal circumstances.
- Fixed-Dollar Withdrawals
Some retirees choose to withdraw a set amount of money each year for a certain number of years. For instance, you might opt to take out $100,000 every year and then check if this amount still works for you after five years. This approach gives you a steady income to plan your budget around, but it doesn’t consider the rising cost of living due to inflation. Also, if you set the amount too high, you might start eating too far into the money you have invested. Plus, if the market is down and your investments are worth less, you might have to sell more than you’d like to get the cash you need.2
- Fixed-Percentage Withdrawals
Another withdrawal strategy is to take out a certain percentage of your total investments each year.3 How much money you’ll get can change since it depends on how much your portfolio is worth at the time. This can make your annual income a bit unpredictable, but if you withdraw a smaller percentage than what your investments are expected to earn, your income and the value of your account could actually go up over time. But be careful—if you take out too much, you might run out of money sooner than you think.
For example, if you have $3 million saved up for retirement, and you decide to withdraw 3% per year, you’ll have $90,000 to use that year.
- Systematic Withdrawals
With a systematic withdrawal strategy, you only withdraw the income (such as dividends or interest) created by the underlying investments in your portfolio. Because your principal remains intact, this is designed to prevent you from running out of money and may afford you the potential to grow your investments over time, while still providing retirement income.4 However, the amount of income you receive in any given year will vary, since it depends on market performance. There’s also the risk that the amount you’re able to withdraw won’t keep pace with inflation.
Are there other withdrawal strategies? Certainly. Which strategy is best for you? That really depends upon your unique situation. If you’re approaching retirement or lack confidence in your current strategy, we’re here to help.
If you are approaching retirement, download our free retirement toolkit, which includes our retirement book and several useful guides that cover the most important financial considerations for retirement.
If you have questions about your retirement strategy, call us at 602.343.9301 or schedule a meeting with one of our advisors.
1 “What Are Retirement Withdrawal Strategies?” BlackRock, 2023, www.blackrock.com/us/individual/education/retirement/withdrawal-rules-and-strategies. Accessed 7 Dec. 2023.
2 “What Are Retirement Withdrawal Strategies?” BlackRock, 2023, www.blackrock.com/us/individual/education/retirement/withdrawal-rules-and-strategies. Accessed 7 Dec. 2023.
3 “What Are Retirement Withdrawal Strategies?” BlackRock, 2023, www.blackrock.com/us/individual/education/retirement/withdrawal-rules-and-strategies. Accessed 7 Dec. 2023.
4 “What Are Retirement Withdrawal Strategies?” BlackRock, 2023, www.blackrock.com/us/individual/education/retirement/withdrawal-rules-and-strategies. Accessed 7 Dec. 2023.
This content is provided for informational purposes only. It is not a guarantee of future success, is subject to change, and is not intended to serve as the basis for an individual’s financial decisions. All investments are subject to risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values. Strategy Financial Group does not provide specific legal or tax advice. Please consult with a qualified professional for guidance on your individual situation. Investment advice is offered through Strategy Financial Services, LLC, a registered investment adviser. Any references to lifetime income generally refer to fixed insurance products, not securities or investment products. Insurance and annuity product guarantees are backed by the financial strength and claims-paying ability of the issuing insurance company and may be subject to restrictions, limitations or early withdrawal fees. Insurance products are offered through Strategy Financial Insurance, LLC, an affiliate of Strategy Financial Group, LLC. Annuities are not suitable or appropriate for all individuals, are subject to fees and surrender charges, and pay customary commissions to Strategy Financial Insurance and/or your licensed insurance agent. Clients are never obligated to purchase the insurance products we recommend, or to purchase them through our affiliates.