Finances in Retirement - Investments

Six Tips for Making a Retirement Drawdown Strategy

by Alli Thomas

Aug 25, 2022

After decades of planning and putting money away, you may think it would be easy for most people to shift from a savings mindset to a spending mindset. Yet one often overlooked aspect of retirement planning is making a retirement withdrawal strategy.

Retirement Withdraw Strategies

When mapping out your retirement withdraw strategy, you must consider factors that include:

  • Your marital status

    Marital status and state of residence are the two major factors affecting your optimal retirement withdrawal strategies. With strategies in place to receive the full value of the joint taxable account upon a spouse’s death for a married couple in a community property state, it may be worth holding off withdrawing the funds from the tax-deferred accounts till the event of the step-up.

  • Your savings

    A few options are the 4% retirement withdrawal rule, the fixed dollar withdrawals, and the withdrawal buckets strategy.

  • Your life expectancy

    One of the hardest things to determine is how long you will live. The current average life expectancy for a male is 84 years whereas a woman is 86.6 says the Social Security Administration.

  • The kinds of retirement accounts you have

    You will find that there are different rules to consider for IRA withdrawals, Roth IRA withdrawals, and traditional 401 k withdrawals.

  • What do you think your living expenses will be in retirement?

    Someone aged 65+ spent on average a little over 4k a month, coming to almost 49k a year between 2016 and 2020 says the Bureau of Labor Statistics. Keeping this number in mind and paying attention to inflation will keep your withdrawal strategies on target.

Here are six tips that will help you plan a retirement drawdown strategy that accounts for these and other key variables and provides you with a predictable annual income:

1. Plan in Advance to Minimize Taxes

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Reducing your tax bill will have one of the biggest impacts on your retirement savings. Advanced tax planning that takes advantage of all three tax “buckets” – taxable accounts (savings accounts, investment accounts), tax-deferred accounts (traditional IRAs, 401(k)s), and tax-free accounts (Roth IRA, tax-exempt bonds) – can reduce your taxable income in retirement, leaving you with more money after you make your withdrawal (and reducing how much money you need to take out to maintain your lifestyle).

There could also be additional tools, such as trusts, that you could take advantage of to reduce your tax liability. Your tax plan will guide you to a tax-efficient withdrawal strategy that helps you get the most out of your retirement savings.

Bucket withdrawal strategy

The Bucket withdrawal strategy will have you pulling from three buckets. These will be separate accounts that will hold your assets. The three buckets will include a savings account with three to five years of your living expenses, second is a fixed income security, and the third contains the rest of your investments in equities. As you deplete the first bucket you can replenish using the earnings from the other buckets. This will allow your savings to grow but is a more hands-on approach to your retirement income and will become more time-consuming.

Don’t forget about the required minimum distributions

Once you turn 72, you will have to take the required minimum distributions from your tax-deferred accounts. This covers all employer-sponsored retirement plans and all traditional IRA variants. You will have to take a distribution based on the amount in each account, modified by a life expectancy factor that the IRS publishes every year. These calculations can be complex, so you will benefit from working with a financial advisor to ensure you take the correct amount (if you don’t, the IRS will hit you with a substantial penalty) in addition to allocating your assets in the most tax-efficient way possible.

Fixed dollar withdrawals

A fixed dollar withdrawal plan will have a fixed dollar amount you withdraw from savings each year. This can be reassessed every few years, but you leave the amount set for five years.

2. Make the Right Decision About Social Security Benefits

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The debate about whether it’s better to take Social Security earlier or postpone it rages on. Your ideal age to start collecting those benefits depends on several factors, including your marital status, how much you need the money, and even whether your family has a history of early death or terminal disease.

Social Security

If you decide to start collecting as early as possible (at age 62), you’ll get 30% less than if you had waited until your full retirement age (which is based on your birth date). If you can manage to delay taking it until age 70, your monthly benefit may be up to 24% more.

Be sure to include your benefits in your tax plan as they become taxable after a certain income level – above $25,000 for single filers and $32,000 for married couples filing jointly.

3. Choose the Right Pension Payout

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If you’re lucky enough to have a defined benefit plan, you must decide how to withdraw those assets. Should you take a lump-sum payout, or annuitize your pension? Each option has benefits and disadvantages. Pension withdrawal strategies can be complex, so it’s best to consult a financial advisor before making any decisions. Your pension withdrawal strategy should also be accounted for in your tax plan.


Financial Classes for a Better Retirement

4. Balance Guaranteed Income and Long-Term Growth

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Guaranteed retirement income includes Social Security benefits, payouts from pension plans, and annuities. Variable retirement income comes from earnings on your investments. You’ll need to determine how much guaranteed income you’ll need to cover non-negotiable living expenses (like housing, healthcare, and food).

Once you’ve determined those costs, then you can decide how much variable income is required to pay for your discretionary expenses (such as your hobbies, travel, and entertainment). This will help you decide how you allocate your investment portfolio,

5. Plan for Longevity

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Lifespans keep rising. Depending on your health, you could be looking at spending between 20 and 30 years in retirement. How can you avoid outliving your retirement savings?

Some options to explore are working longer, maxing out your contributions to retirement plans, and using other types of financial products such as an annuity, which can guarantee an income stream for life.

6. Account for Inflation

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Most people invest more conservatively as they age. Of course, you shouldn’t put your nest egg at risk by investing too aggressively. At the same time, the earnings on your investments MUST keep pace with inflation. That means they should exceed at least 3% a year. Otherwise, your savings will eventually lose their purchasing power – and you could run out of money.

The challenge with a high rate of inflation is that you need more money to maintain your lifestyle.  However, unless your investments provide a higher rate of return, withdrawing more increases the likelihood of running out of money. At the same time, the 4% rule, a popular retirement withdrawal strategy that provides a larger amount of income is falling out of favor.

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What is the 4% rule

The 4% rule has been around since the mid-1990s. It can also be referred to as the fixed percentage withdrawal strategy. The basic premise of this strategy is that retirees can withdraw 4% of their portfolio savings in their first year of retirement.  In each subsequent year, that amount gets adjusted to account for inflation.  However, some experts now say that 4% is too much money to withdraw and recent research from Morningstar suggests that a better starting withdrawal rate would be 3.3%.

Why could withdrawing 4% be too much?

Yields on bonds, which tend to be a popular investment option for retirees, have been extremely low in the last decade, while stocks have been very expensive.  These two factors make it unlikely that the 4% withdrawal rate will remain feasible for retirees. With a high rate of inflation, a lower withdrawal rate would likely mean a reduction in your lifestyle.

However, the assumptions used in the research skew to the more conservative side, based on a 90% probability that a retiree won’t run out within 30 years; a less conservative approach could provide for a higher withdrawal rate. Additionally, the 4% (or 3.3%) rule does not consider non-investment income sources.

The importance of planning

The combination of high inflation and lower returns makes evaluating retirement withdrawal strategies harder than before.  If you’re planning on retiring soon, now is the time to start narrowing down your options. This challenging task can be made easier when working with a professional advisor.

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Alli Thomas

Alli Thomas has worked in the financial services industry for nearly 20 years, with a focus on retirement-related investing. She began her career as a FINRA-licensed participant-services call-center associate at Vanguard, and then moved to Principal Financial Group, where she worked closely with employers, assisting with retirement plan set-up and design, selecting appropriate plan investment offerings, and maximizing employee participation through targeted education campaigns and enrollment meetings. Alli has also worked as a qualified 401(k) administrator and registered investment advisor for several small investment firms. She now writes about all things investment- and finance-related, leveraging her extensive experience and passion for retirement planning to help investors make well-informed financial decisions.

One Response

  1. […] of the most popular rules of thumb when it comes to retirement spend-down strategies is the 4% rule – we wrote about it just a few months […]