Retirement Withdrawal Strategies You Should Consider

retirement withdrawal strategies
April 23rd, 2021 0 Comments

In our last article we discussed the 4% rule — a retirement withdrawal strategy suggesting that retirees can safely withdraw 4% of their total retirement savings every year for 30 years without running out of money. The 4% rule is a fairly controversial retirement withdrawal strategy, and likely not one that will work for everyone. So in this article, we will be reviewing several other retirement withdrawal strategies.

Planning for retirement income is not easy. Many factors will affect how much you save and how much you need to withdraw. Luckily, there are also many different retirement withdrawal strategies and experts who can help figure out what works best for you.

Below, we will discuss

  • the importance of having a retirement withdrawal strategy well before you reach retirement age
  • how to approach your retirement planning while taking into account the tax effects of your withdrawals
  • different factors that will impact your retirement income
  • several options for retirement withdrawal strategies


Retirement Planning Mistakes to Avoid

It is a well-known issue that far too many American workers fail to effectively save for retirement. Sometimes the reasons for this are circumstantial. Sometimes they are due to a lack of education regarding retirement saving. Other times they are are due to poor — or a lack of — planning. Usually there is a combination of reasons.

Whatever the cause of poor retirement planning, the consequences can be dire:

  • people left without enough money to afford the medical care they need
  • a lack of resources to pass onto children and grandchildren
  • having to skimp on things you previously took for granted later in life
  • being forced to work longer than you’d like to

For these reasons and more, it is extremely important to have investment accounts dedicated to a retirement withdrawal strategy well before you plan to retire.


Looking at Sources of Retirement Income

In starting to think through the retirement planning process, let’s briefly look at the most common sources of retirement income.

Major sources can include

  • Wages earned through employment
  • Social security
  • A pension or 401(k) plan through their places of work (for some)

Then there are other bonus streams of income such as

  • IRAs (Individual Retirement Accounts)
  • Annuities
  • HSAs (Health Savings Accounts)
  • Taxable investments

This is not an exhaustive list, but it does cover most of the major income sources that people use to save for retirement.

If you are at a loss as to how to begin retirement planning, figuring how much money from these various sources you can set aside and/or invest towards retirement is a good place to start.

It is also extremely important to think through lifestyle factors that may affect your retirement income and needs early on in the process. This could include when you plan to retire, your health and the medical needs of you and your loved ones, living expenses, anticipated leisure activities and travel, dependents, etc.

And then there are the more logistical and financial factors. The big ones to consider that are likely to impact your retirement income are your tax situation, portfolio diversification, and then two that we have already mentioned — social security/pension benefits and life expectancy.


Retirement & Taxes

The first thing to remember when considering the impact of retirement withdrawals on your taxes is that you will likely owe taxes on your social security benefits. Therefore, it is important to factor in the amount that you will have to pay in taxes when creating a budget.

Remember that taxes will not be automatically withheld from your social security checks, so you really do have to budget them in.

Of course, there’s much more to consider than just social security taxes. It is also quite possible that you will have to pay taxes on the money you withdraw from your retirement savings accounts, traditional IRA, and 401(k). Some good news is that withdrawals from Roth IRAs and Roth 401(k)s are generally tax-free, since contributions are taxed.

Figuring out how best to navigate the tax impacts of your retirement savings and withdrawals can be quite tricky, and like most things, the best approach varies depending on your circumstances.

We have a few general tips we will offer in our discussion of retirement withdrawal strategies later on, but for the best results, we highly recommend consulting with a professional. It is also worth noting that if you begin taking distributions before the age of 59.5, you are likely to face tax penalties.


Diversifying Your Portfolio

Now we want to briefly touch on portfolio diversification, and the impact it can have on your retirement income. The benefits of diversifying your portfolio are common knowledge: you are protecting yourself against any extreme market losses by spreading your assets around different classes. In theory, these will not all plummet at the same time.

In terms of diversifying your portfolio with retirement savings in mind, you should always be looking towards investing in assets. Especially consider assets that bear interests and are non-correlated, like stocks and bonds.

Remember to think about lifestyle factors such as your current age and planned year of retirement when constructing your portfolio. You have much more risk-taking flexibility if you are young and/or are planning for retirement in the long term than if you plan to retire in the next ten years.


Retirement Withdrawal Strategies to Consider

Now that we have reviewed general reasons to plan for retirement, and factors that will impact your finances, let’s look into specific retirement withdrawal strategies you may want to consider.

First, we want to note that there are many retirement withdrawal strategies out there. For the most part they can be adjusted to cater to your specific needs and situation. So, while we will be providing an overview of some  common strategies in this article, these are by no means your only retirement withdrawal options.

The Buckets Strategy

Let’s start by talking about the “buckets” approach to retirement withdrawals. In a nutshell, the buckets strategy advocates for withdrawing your assets from three separate “buckets” or accounts that hold your assets.

The three buckets are

  1. a savings account that should hold about three to five years’ worth of living expenses (cash)
  2. fixed income securities
  3. equity investments

The idea is that you withdraw from your savings account (the first bucket) to cover your living expenses. Then you replenish that bucket with money from the other two. This eliminates the possibility of needing to sell assets at a loss. You can sell stocks or fixed-income securities to replenish your savings account. If the market is not palatable for either of these options, you can continue to take money from your savings account until it is.

The biggest benefit to the buckets strategy is that it gives you more control over when you sell your investments. It also leaves open the possibility of your account balance to grow over time. The drawbacks are that it can be labor intensive, as well as time-consuming. It takes work to navigate when to sell and replenish the first bucket. This strategy also does not provide guidance on how much you should be withdrawing each year.

The Fixed-Dollar Method

The fixed-dollar method is another popular approach to retirement withdrawals. This approach is fairly straightforward, and you may recognize the overarching strategy from our discussion of the 4% rule in the last article. The fixed-dollar strategy suggests that you take the same amount of money out of your retirement account each year for a predetermined period of time.

There are two major ways in which the fixed-dollar strategy differs from the 4% rule:

  1. it does not have to be 4% of your total retirement savings that you withdraw each year
  2. it leaves the door open for you to adjust the amount you want to withdraw

Maybe you withdraw $15,000 for the first five years and then realize that’s not enough — from there you can reassess and figure out how to begin withdrawing more.

There are benefits and drawbacks to the fixed-dollar method. On one hand, it’s straightforward and predictable. It guarantees you an expected annual income and gives you the flexibility to determine the right withdrawal amount for you. The biggest downside is that — if you don’t adjust for inflation — you will be receiving less money each year and risk potentially running out of money.

The question of inflation, of course, takes away some of the simplicity of the fixed-dollar strategy as well.

The Systemic Withdrawal Method

The last retirement withdrawal strategy we will review is the systemic withdrawal method. In the systemic withdrawal strategy, you don’t touch your principal invested during retirement. Instead, you withdraw the income produced by your investments through interest or dividends. The biggest upside to this strategy is that it eliminates the possibility of running out of money.

However, you have to start with a sizable nest egg to provide you with enough money throughout retirement. The systematic withdrawal method also does not guarantee a fixed income throughout retirement. Your withdrawals will depend largely on the market.

This can make it difficult to plan for your retirement income long-term, but again, if you have a large enough nest egg that may not matter too much.


Design Your Retirement Withdrawal Strategy

All of this being said, your retirement is all about you, and we want to help.

Contact us here to schedule a meeting to discuss your retirement goals and we can find the strategy that best serves you.



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Retirement Withdrawal Strategies You Should Consider
Everyone has to retire at some point, so look over your retirement withdrawal strategies ahead of time to plan what's best for your future.
Retirement planning, Saddock Wealth
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