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15 Retirement Withdrawal Strategies to Protect Your Wealth

Best Ways to Withdraw From Retirement Accounts

Most of us look at retirement with a sense of anticipation and a feeling of dread. Typically, retirement drawdown strategies aren’t at the top of mind.

It is not easy to transition from accumulating wealth to suddenly managing years of withdrawals. You have worked hard to accumulate wealth. You need your wealth to last through your life without running out.

Before you experience the joie de vivre of leaving your 9 to 5 behind, take a moment to think about the best and most tax-efficient retirement withdrawal strategies. Also, consider steps to maximize and organize your finances before taking retirement withdrawals.

Learn how to decumulate retirement savings and generate income in a tax-efficient way.

This article may contain affiliate links which means that – at zero cost to you – I might earn a commission if you sign up or buy through the affiliate link.

Before reviewing your retirement drawdown strategies, brush up on the tax consequences of retirement withdrawals. What matters is how much of your retirement withdrawals you keep, not how much you draw down.

Understanding Tax-efficient Retirement Withdrawal Strategies

Retirement withdrawal strategies involve knowing how your income is taxed.

Taxable AccountsTraditional Retirement AccountsRoth IRA –
Individual Retirement Accounts
Type of AccountsInvestment brokerage,
savings,
certificate of deposit.
Traditional 401(k), 403(b), IRA, rollover IRA.Roth 401(k), 403(b), IRA, rollover IRA.
Type of Taxes Capital gains, dividends,
interest.
Ordinary income taxes – when withdrawn.No tax impact – when withdrawn.
Important
Considerations
Low tax rates on capital gains and qualified dividends.
Interest income taxed as ordinary income.
Contributions were made, pre-tax. Taxes depend upon your marginal tax rate. Withdrawals are factored in to determine Social Security tax and Medicare premiums.Taxes were paid pre-contribution. Contributions grow tax-free.
For tax-efficient retirement withdrawal strategies – Know tax treatment of withdrawals and investment gains

Bonus; Money Can’t Buy Happiness, But…..

15 Best Retirement Withdrawal Strategies

The best retirement withdrawal strategies will depend upon your age and tax bracket.

  • Understand the tax consequences of your retirement withdrawals.
  • Be mindful of how much money you need and how much retirement income you expect.
  • Unpack the mysteries of Required Minimum Distributions or RMDs.
  • Create a retirement drawdown plan that works for you.

1. Set the Stage for Retirement Withdrawals

Before you plan a retirement draw down strategy for your day-to-day living, map out expected income and expenses. Don’t forget leisure activities. These could include traveling the world, starting a new hobby, or buying a new car or house.

Set a budget for each of these activities so that a sudden whim does not become a cause for concern.

Empower offers free retirement planning tools and calculators for free. Those with more than $100,000 are eligible for a FREE portfolio review:

2. Know Your Expenses Before Mapping a Drawdown Strategy

Research reveals that earlier in retirement, your expenses are typically higher. This is the time you’ll be traveling and enjoying more leisure activities. During your final retirement years, prepare for added medical expenses. Where you live in retirement will have a major impact on costs in retirement. Track current expenses for several months and adjust accordingly for expected changes in retirement.

Though few relish change, the city you choose to reside in post-retirement can greatly impact retirement expenses. Many retirement calculators can assist with expense and income planning.

Find out; How to Prepare for Inflation

Keep a 10% spend buffer. If you estimate your monthly expenses to be $4,000, add an extra 10% or $400 to your retirement expense planning.

3. Establish a Source of Regular Income to Boost Retirement Income

With volatile investment markets and growing life expectancy, it might be a challenge to estimate whether your savings will last your lifetime. To mitigate the uncertainty, develop a source of additional income during retirement. You can take up a part-time job, consult, or rent out property. Use the extra cash to catch up on your retirement savings.

Explore income-generating investments like dividend equities, fixed income bonds, or alternative investments, like Groundfloor real estate debt note investing.

Build up your cash as retirement approaches. Ideally a cushion of one to two years of spending will keep you from having to withdraw from stock accounts should there be a downturn. The best places to store cash is in a CD or high yield cash account like the Wealthfront Save High Yield Cash Account.

4. Plan for the Possibility of Outliving Your Money

It is never easy to guess how long you will live. That’s why it is crucial to hedge the risk of outliving your savings. You can buy longevity insurance via a deferred annuity. The basic idea is that you buy an annuity today that doesn’t start until close to your expected mortality date.

Annuities can be expensive and difficult to understand. The Vanguard Investment Company, known for low fees and a reputable line up of index funds offers a helpful guide to Annuities.

Word of caution: Annuities are complex instruments. Consult with an advisor if considering one.

5. Utilize Home Equity for Retirement Income

For many, your house is your greatest asset. Investigate the retirement withdrawal strategies that draw on your home’s equity.

If the property value has increased, you can sell your house. The proceeds from the sale might be used to pay off your mortgage, buy or rent a smaller place and pay living expenses during retirement. If you invest the proceeds of the sale in dividend paying stocks and bonds, you can create an additional retirement income stream.

Tapping a home equity line of credit enables the retiree to borrow money against their home for specific expenses and repay it when extra cash is available.

Consider a Reverse Mortgage for extra income in retirement. As these are complex financial instruments, with high fees, consult an impartial advisor for guidance on reverse mortgages.

If you need help with your investments, we’ve partnered with WiserAdvisor to provide you with access to three vetted Financial Advisors – in your area. Click the image below to sign up.

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best ways to withdraw retirement funds - couple walking in sunset

6. Plan for Tax Efficiency

Ordinary income tax is levied on withdrawals from IRA, 401(k) and 403(b) accounts. Consider rolling over traditional IRA funds into Roth IRAs, during years when your marginal tax rate is lower. This might save taxes if your tax rate will be high in retirement.

Invest in stocks and stock funds in taxable accounts, as capital gains and qualified dividend payments receive favorable tax treatment, typically at a rate lower than ordinary income.

Bond interest is typically taxed as ordinary income. With higher tax consequences on bond interest, owning fixed income investments in retirement accounts might save money on taxes.

It is worth the effort to understand how tax is levied on each of those accounts and how money can be withdrawn from them to minimize tax obligations.

For example, if you withdraw from a SEP, SIMPLE, or a Traditional IRA, after you are 59.5 years you are taxed at the current tax bracket. However, no taxes will be levied if you withdraw from a Roth IRA, subject to account being at least five years old.

Sign up for the free Empower Money Management Tool Kit with access to a top retirement calculator. 

7. Maximize Social Security

While you can start drawing Social Security once you hit 62, it’s advisable to wait as long as possible. 

At age 66 you get your full retirement benefit. But, wait to claim Social Security until age 67 and you’ll get 108% of your 62 year old Social Security benefit. 

If you wait to claim until age 70, you’ll get 132% of the full retirement monthly benefit. 

Bonus: Can You Rely on the 4% Rule in Retirement?

8. Think Beyond the Standard Glide-path

Most target-date funds come with a standard glide path.

The concept is simple. You start with a high equity allocation when you are younger. As you near retirement, its recommended to lower the equity allocation in favor of bonds and fixed income assets.

But the traditional advice merits revisiting. Bond yields may not provide as much cash flow today as in prior decades and healthy individuals can expect longer life spans.

Wade Pfau and Michael Kitces wrote in the Journal of Financial Planning, “Reducing Retirement Risk with a Rising Glidepath,” that as retirement progresses you might want to gradually shift your asset allocation into greater stock allocation.

This strategy reduces portfolio volatility in the early retirement years when retirees are most at risk of losing the most due to a market drop early in retirement and increases portfolio appreciation with higher equity allocation as you age. 

9. Look Into Long-term Care Insurance

Long-term care insurance can help you cover the cost of nursing home or home care in your advanced years. These unexpected healthcare expenses can decimate your savings if not properly cared for.

Buying long-term care insurance is less expensive for younger adults. So, compare policies while in your 50’s to find the best product. Similar to all insurance, you’re paying regular premiums to minimize potentially high health care costs in the future.

10. Consider Rolling Over Your 401(k)

If you still have an old employer’s 401(k) account, consider rolling it over into a Traditional or Roth IRA at a robo-advisor or investment firm. This gives you greater flexibility on managing your retirement assets and may also reduce account management fees. 

If you roll over a 401(k) into a Roth IRA, you’ll pay ordinary income taxes now, instead of later. But the benefit is that with a Roth IRA, both compounding growth and withdrawals are tax-exempt. And, Roth IRAs don’t require a withdrawal schedule, such as required minimum distributions from a Traditional IRA.

You might want to consult with a financial advisor when deciding whether to roll over your 401(k):

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The Retirement Drawdown Strategy Details

Once you enter your retirement phase, you need to start withdrawing money for your day-to-day needs.

To ensure that you don’t run out of money after a few years, your assets must generate sufficient returns to make up for your withdrawal.

The larger the difference between how much money you withdraw (retirement drawdown rate) and the returns your investment generate, the longer your money will last. If you retire before age 70 and can afford to delay Social Security benefits until then, you’ll need a retirement drawdown strategy that maximizes your portfolio withdrawals and maintains growth.

Sign up for the free Empower Money Management Tool Kit with access to a top retirement calculator. 

11. The Four Percent Rule of Thumb

The four percent rule says that you can withdraw 4% of your retirement portfolio balance in the first year. In subsequent years, you can adjust the 4% withdrawal rate for inflation.

Assuming a 50-50 allocation between stocks and bonds, this strategy is expected to give you a 90% chance of the portfolio lasting for 30 years[3].

Though this is a good starting point, it suffers from a few drawbacks.

The rule, created by William Bengen in 1994, is based on historical returns for bonds and stocks before the study. However, since then, bond yields have dropped considerably. And equity returns are not stable.

Most withdrawal rates don’t account for the future return of the portfolio and the length of the retirement period.

Other retirement withdrawal strategies are worth consideration.

12. Fixed Amount Retirement Withdrawals

If you and your spouse receive $45,000 in Social Security payments and your total expenses are $65,000, you might withdraw $20,000 per year to make up the difference.

If your investment portfolio is worth $500,000 or more, then you’ll be withdrawing a maximum of 4%. This should work out fine, if your inflation-adjusted investment portfolio returns surpass 4%.

Problems will arise if your portfolio is worth less than $500,000 or inflation ramps up and returns don’t keep up. This strategy could also fail if withdrawals aren’t adjusted during a stock market drawdown.

If you’re retirement portfolio is worth less than $500,000 Retirable can help advise you. They also offer a free consultation – click below.

13. Fixed Percentage Retirement Withdrawals

Fixed percent retirement withdrawals is a flexible strategy to maximize your net worth. You might choose an amount less than the 4%, such as 3 or 3.5% of your assets. This increases the likelihood of success. A fixed percent withdrawal rate means that when markets are down, you’ll be forced to spend less, than when your asset growth flourishes. That’s why it’s helpful to keep your assumptions conservative, when determining the best ways to withdraw from your retirement accounts.

The benefit of this fixed percent retirement drawdown strategy is its flexibility. You’re prepared to adjust drawdowns when markets decline. You can also set the percent at a rate that is lower than 4% and thus increases the likelihood of your money outlasting your life.

Bonus: Use a retirement calculator to help you decide the best planning strategy. Sign up for the free Empower Money Management Tool Kit with access to a top retirement calculator. 

14. Withdraw Only Dividends and Interest

The benefit of this retirement income drawdown plan is that it’s likely that your portfolio will last. Since you’ll be distributing dividends and interest, your total net worth growth is dependent on asset appreciation. If your portfolio is worth $700,000 and you receive 3%% interest and dividends, then you’ll withdraw $24,500 per year.

This strategy only works if your portfolio is large enough to support your financial needs. You’re also at risk of changing dividend and interest rates.

On a positive note, your portfolio is likely to last for your lifetime and beyond when withdrawing only dividends and interest payments.

15. The Bucket Retirement Withdrawal Strategy

The Bucket Retirement withdrawal strategy divides your assets into three buckets:

  • Bucket #1 – Includes the assets you’ll need for the next three to five years. These assets are invested in cash-equivalents such as high yield cash or money market funds. They’ll hold their value, although aren’t protected from the impact of inflation. This ensures that you will have your near-term financial needs met and if the financial markets tank, you won’t have to sell at the bottom.
  • Bucket #2 – The second bucket is conservatively invested in bonds and fixed income investments, which are less volatile than equities. Bucket #2 is used to refill bucket #1 and cover intermediate expenses, up to seven or eight years.
  • Bucket #3 – This is the risky asset bucket of equities and designated for capital growth. Since stock market investing is more volatile, you have enough of a cushion in buckets one and two to cover expenses during a market crash. Bucket #3 also ensures you have enough funds invested in riskier stock funds to provide capital appreciation. Assets from Bucket #3 can be sold and transferred to Bucket #2, when necessary.

Best Ways to Withdraw From Retirement Accounts Wrap up

Regardless of the retirement draw down strategy that you choose, review your finances annually. Track your net worth, inflation rates, expenses and income. Adjust your plan as necessary. Use a good retirement calculator. Empower is one of our favorite retirement calculators:

When you hit age 73, you’ll need to take Required Minimum Distributions. So, whichever retirement withdrawal strategy you elect, make sure that you have enough cash-equivalent and bond investments in your IRA or 401(k) accounts to cover RMDs. This will safeguard you from selling stocks after a decline.

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