Home Bankrate.com Retirement Withdrawal Strategies: 4 Ways To Help You Extend Your Savings

Retirement Withdrawal Strategies: 4 Ways To Help You Extend Your Savings


ou’ve worked and saved for much of your life and now it’s finally time to retire and live off those savings. What’s the best approach to maximizing your retirement accounts such as a 401(k) and IRA to ensure you don’t experience a common retirement fear – outliving your money?

Here are some top strategies for withdrawing your retirement funds, from three planning experts.

The critical issue: Outliving your money

While retirees may have different worries from those still in the workforce – healthcare and living on a fixed income, for example – one of the most vital is ensuring you don’t outlive your income.

“The biggest concern people seem to have is running out of money in retirement,” says Chad Parks, founder and CEO of Ubiquity Retirement + Savings in San Francisco. “The first step is to take a look at the amount you want to withdraw from your retirement plan and ask yourself if this is your only source of income in retirement.”

In this regard, Social Security is a fantastic retirement plan that ensures at least one source of income won’t run out. You’ll receive your check for life. That’s also part of the appeal of annuities, which can promise a guaranteed retirement income for as long as you live.

And your potential longevity is an important consideration in any calculation, too.

“Typically, when retiring at ages 65-67, a good rule of thumb is to plan on 20-25 years of needing money after you stop working,” says Parks.

One way to avoid outliving your money is to reduce what you need in retirement. For example, you may downsize your lifestyle to accommodate a lower income. However, you can take steps before you retire that minimize your need to tap retirement funds, too. For example, by paying off your mortgage or car loan while you’re still earning money, you’ll reduce what you need to pay out later.

By reducing your income needs, you may also set yourself up to tap retirement funds tax-free.

But smart retirement planning and withdrawing your retirement funds in the most effective way can also help you extend your nest egg and make sure that you have a comfortable retirement.

4 top retirement withdrawal strategies

As you’re considering what you need for retirement, don’t forget that you likely have a monthly paycheck coming in from Social Security as well. From this income you can work backward to figure out how much money you need each month.

These withdrawal strategies can help you extend your savings and meet your goals.

1. The 4 percent rule

The 4 percent rule is an oldie, but it remains a popular way to withdraw retirement funds, because it promises to always keep some money in reserve for later withdrawals.

With this strategy you withdraw no more than 4 percent of your funds each year, a level that could extend your savings quite a while. It’s especially useful if you have some investments in stocks, which tend to grow much faster than that each year. If your portfolio earns more than 4 percent in a given year, you’ll actually gain money overall, despite the withdrawal.

Each year the withdrawal is adjusted based on how much money is in the accounts. So your retirement income could fluctuate, both higher or lower, depending on your investments.

Downsides: Some retirees want a stable income, not a fluctuating one, so this strategy may be less desirable. And that leads to another issue: losses in your income as the market moves.

“With increased volatility, retirees could see more money being taken out of their portfolios in a bear market,” says Julie Colucci, associate adviser at New England Investment and Retirement Group in North Andover, Massachusetts.

If you have to take money out when the market is down, you lose some ability to ride it back up, and that could permanently hurt your overall income in later years.

2. The fixed-dollar strategy

In the fixed-dollar strategy, retirees determine how much they need to withdraw each year, and then re-assess that amount every few years. The withdrawal could be lowered in the future to match a lower portfolio value or could be raised if investments have increased in value.

“A benefit to the fixed-dollar strategy is that retirees know the exact amount of money they will be receiving each year,” says Colucci.

Downsides: “This strategy doesn’t protect the retiree from inflation risk, and this strategy faces the same downfalls as the 4 percent rule when faced with volatility,” she says.

BankRate, posted on SouthFloridaReporter.com, Aug.19, 2020

Bankrate.com publishes original and objective content to help you make smarter financial decisions. Our award-winning reporters and editors provide expert advice on nearly every major financial decision you may encounter — from purchasing your first home, to selecting a new car, to saving for retirement.


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