When planning for retirement, we often focus on the accumulation phase: saving diligently and investing wisely. We spend 40 or more years of our lives focused on building the proverbial “nest egg,” but after retirement, things change—and so should our financial focus.
The Importance of a Withdrawal Strategy
Once retirement begins, questions about withdrawing funds become central to financial planning. How much should you withdraw annually? Should you prioritize withdrawals from your IRA or your brokerage account? Should you withdraw a fixed percentage or a fixed amount? How much will you leave behind for your heirs?
Having a well-planned withdrawal strategy is essential because it can put you in a position to:
- Prolongs the lifespan of your retirement savings.
- Reduces your overall tax burden.
- Provides a more balanced income stream.
- Preserves wealth for legacy purposes.
4 Common Withdrawal Strategies
There are several ways to withdraw money in retirement. While working with a trusted financial advisor is invaluable, understanding these common strategies can help you determine which might be the best fit for your needs.
1. The 4% Rule
The 4% rule is a widely known guideline suggesting that you withdraw 4% of your retirement savings in the first year of retirement, adjusting for inflation in subsequent years. For example, if you have $3 million in retirement savings, you would withdraw $120,000 in the first year.
This approach aims to provide a steady income while keeping the principal balance largely intact. However, it’s not a one-size-fits-all solution. The 4% rule doesn’t account for:
- Market volatility.
- Interest rate trends.
- Tax implications.
- Unexpected expenses.
- Changing personal circumstances.1
2. Fixed-Dollar Withdrawals
Some retirees opt to withdraw a set amount each year for a specified number of years. For instance, you might withdraw $100,000 annually and reassess after five years. This method offers predictable income for budgeting purposes but has potential drawbacks:
- It doesn’t account for inflation.
- A high withdrawal amount may deplete your investments prematurely.
- Market downturns could force you to sell assets at unfavorable times.2
3. Fixed-Percentage Withdrawals
This strategy involves withdrawing a fixed percentage of your portfolio annually. Your income will vary depending on your portfolio’s performance, making this approach less predictable. However, withdrawing a smaller percentage than your investments’ expected returns can help grow your portfolio over time.
For instance, if you have $3 million saved and withdraw 3% annually, you’d receive $90,000 in the first year. This method requires caution, as withdrawing too much could exhaust your savings prematurely.3
4. Systematic Withdrawals
With systematic withdrawals, you only withdraw income generated by your portfolio, such as dividends or interest. This method helps preserve your principal and may allow your investments to grow over time. However, the income amount depends on market performance and may not keep pace with inflation.
Choosing the Right Strategy
These four methods represent just a fraction of the options available to retirees. The best strategy for you will depend on your unique financial situation, goals, and risk tolerance. Factors such as life expectancy, health considerations, and tax implications also play a critical role.
How a Wealth Advisor Can Help
Partnering with a knowledgeable wealth advisor can simplify the complexities of retirement withdrawals. They can:
- Analyze Your Financial Picture: Assess your retirement savings, expected expenses, and income sources.
- Develop a Customized Plan: Craft a withdrawal strategy that aligns with your goals and minimizes tax burdens.
- Provide Ongoing Support: Monitor your plan and make adjustments as your circumstances evolve.
By leveraging their expertise, you can enjoy peace of mind knowing your financial future is in capable hands.
Ready to Take Your Financial Plan to the Next Level?
At Voyager Wealth Advisors, we specialize in helping retirees navigate the complexities of withdrawal strategies. Our experienced advisors work closely with you to create a personalized plan that strives to protect your wealth, your legacy, and supports your retirement dreams.
Schedule a discovery call with one of our lead advisors today. Together, we’ll review your financial situation, estate plan, and goals to craft a comprehensive strategy tailored to your needs.
Sources
- “What Are Retirement Withdrawal Strategies?” BlackRock, 2023, www.blackrock.com/us/individual/education/retirement/withdrawal-rules-and-strategies. Accessed December 7, 2023.
The forgoing information has been obtained from sources considered reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Every investor’s situation is unique, and you should consider your investment goals, risk tolerance, and time horizon before making any investment or instituting a strategy. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Raymond James and its advisors do not offer tax or legal advice. You should discuss any tax or legal matters with the appropriate professional. Any opinions are those of Voyager Wealth Advisors and not necessarily those of Raymond James.
