Mastering Retirement: Withdrawal Strategies for Retirees
When planning for retirement, we often focus on the accumulation phase: saving diligently and investing wisely. We spend many years saving money for retirement, but once we retire, our financial priorities should shift.
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. It's good to ask a financial advisor, but it's also helpful to learn about options on your own. We’ve compiled a list of four below that are commonly used. Which one sounds like the best fit for you?
The 4% Rule
The 4% rule suggests withdrawing 4% of your retirement savings in the first year of retirement. In the subsequent years, you should adjust this amount for inflation. 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 method provides a consistent income for budgeting, but it doesn't account for increasing living expenses caused by 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.
Fixed-Percentage Withdrawals
Another withdrawal strategy is to take out a certain percentage of your total investments each year. How much money you’ll get can change since it depends on how much your portfolio is worth at the time.
Withdrawing less than your investments' expected earnings can increase your income and account value over time. This is true even if your annual income may be uncertain. But be careful—if you take out too much, you might run out of money sooner than you think.
If you have $3 million saved for retirement and withdraw 3% annually, you'll have $90,000 to spend each year.
Systematic Withdrawals
With a systematic withdrawal strategy, you only take out the money made from your investments in your portfolio. The purpose of this is to protect your money and help it increase in value over time. It also provides income for your retirement.
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.
Bottom Line
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.
Sources:
www.blackrock.com/us/individual/education/retirement/withdrawal-rules-and-strategies
www.blackrock.com/us/individual/education/retirement/withdrawal-rules-and-strategies
www.blackrock.com/us/individual/education/retirement/withdrawal-rules-and-strategies
www.blackrock.com/us/individual/education/retirement/withdrawal-rules-and-strategies
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