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Retirement withdrawal strategies

How to strategically withdraw from your retirement savings

Once you’ve estimated your retirement expenses, determined your retirement income sources, and created a strategy for investing your income sources, the next step is to understand various strategies for withdrawing your retirement savings and decide which withdrawal options make sense for your situation. For many, withdrawal planning represents the most challenging stage of the overall retirement plan since the timing, frequency, length, and magnitude of the distributions are largely hard to predict.

What withdrawal method is for you?

The appropriate withdrawal strategy that works best for you depends solely on your personal situation and preferences. You should consider the size and composition of your portfolio, your income needs, the amount of overall spending flexibility, and your risk tolerance.

Keep in mind, regardless of which withdrawal method you use, the most critical factor in making your savings last a lifetime is taking the time to accurately estimate and plan out your expenses in retirement. Once you retire, review your retirement income plan — at least annually, or whenever your circumstances change so you can adjust your spending strategy and withdrawal rate as needed.

Develop a tax-efficient strategy for withdrawals and RMDs

In addition to determining an appropriate withdrawal rate, you also need to decide the order to withdraw funds from your investment portfolio to help minimize retirement taxes. The Internal Revenue Code (IRC) requires that IRA owners and participants in qualified employer sponsored retirement plans (QRPs) such as 401(k), 403(b), and government 457(b) must begin taking distributions annually from these accounts. These distributions are referred to as required minimum distributions (RMDs). Once you reach your required beginning date (RBD), generally April 1 following the year you reach 73 you will begin taking RMDs, and annually thereafter. Be sure to factor RMDs into your withdrawal strategy.

Although your distribution options vary based on your age and the types of accounts you own, a commonly used strategy is to withdraw money in an order that allows your portfolio to continue experiencing tax-advantaged growth potential and minimizes retirement taxes. But, because every situation is different, your financial and tax advisors are best equipped to help you determine the most appropriate withdrawal strategy for you.

Simplify your finances by designating a single retirement income account

While working, most people receive a predictable paycheck. Your retirement income, however, can be more cumbersome to monitor because your income may arrive at different times and vary in amount. For example, you may receive Social Security at the beginning of each month, your pension payment at mid-month, dividend payments every quarter, and RMDs annually.

There are various methods to "pay yourself" in retirement, but regardless of the method you choose, be sure to consider ways to simplify your cash flow. For example, designate one account for managing your retirement income, such as a checking account, and then:

  • Directly deposit your retirement income payments into your primary account
  • Set up regular withdrawal amounts from your equity and fixed income investments, and move them into your primary account automatically
  • Automatically sweep quarterly interest and dividend payments into your primary account
  • Maintain a cash cushion in your primary account so you’ll have enough money to cover your expenses

Your retirement income account