Financial Resource Center

Retirement Planning

Be Smart When Drawing Down Retirement Funds

by Jan Garkey / September 13th, 2021

When you retire, the word "risk" takes on new meaning with regard to your finances. Before retirement, while you're building your savings, market volatility is your risk. Once you retire, the risk is not having enough money to fund your needs. If you're facing a savings gap as retirement draws near, your drawdown strategy is even more important. You face several key unknowns: how long you will live, what returns your investments will earn, inflation, and medical expenses in later years.

Here's advice that can help you best use the savings you have and improve the likelihood that your money will last as long as you do:

  • Be flexible. Rather than rigidly adhering to a fixed rate of withdrawal, such as the 4% rule, think about a more flexible strategy that increases withdrawal amounts following good investment returns and reduces amounts when returns are poor;
  • Plan on modest withdrawals early in retirement. The first five to 10 years of retirement will have a significant impact on your long-term success. Consider working part-time in the early years to help avoid taking out large chunks from your savings. If you're unable to work, a prudent starting point is 3% to 5% of assets;
  • Create a multiple-bucket strategy. In addition to Social Security and other noninvestment income buckets, create a short-term bucket—a cash reserve equal to about two years of expected withdrawals. Replenish it when you rebalance your portfolio, capturing any gains and moving them into your cash reserve. This will help protect you from having to sell an investment that is temporarily producing low returns;
  • Plan your spending. In early retirement you will probably be more active and spend more than in middle retirement. Your expenses most likely will increase again in later retirement due to health-care costs. Plan for all three phases; and
  • Account for different tax scenarios. Keep in mind that you will pay income taxes on money you withdraw from tax-deferred retirement accounts. While distributions you take from a Roth individual retirement account will be tax-free, money you withdraw from a brokerage account will be subject to capital gains taxes. Large withdrawals can increase your Medicare costs.

The worst thing you can do is nothing. Carefully select a method for drawing down your assets, planning your spending, accounting for taxes and creating a cash reserve to protect you from poor investment returns and unexpected expenses.

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