Retirement Withdrawal Strategies That Can Stretch Your Savings

Choosing the right retirement withdrawal strategy can stretch your savings throughout your retirement years. Effective withdrawal strategies provide a structured way to balance your income needs while preserving your retirement savings. A financial advisor can work with you to create a strategy for your retirement plan.

Why It's Important to Choose a Retirement Withdrawal Strategy

The right retirement withdrawal strategy can provide a steady income stream while preserving the longevity of your assets. This allows you the stability to maintain your desired lifestyle and the flexibility to adapt to changes in the market or your personal circumstances. A well-thought-out strategy can also help you to minimize your taxes in retirement and ensure you comply with required minimum distributions (RMDs) , reducing the risk of costly penalties. Without a clear plan, you risk spending your retirement savings too quickly, leaving you without enough resources to cover living expenses, healthcare costs or unexpected financial emergencies.

4 Retirement Withdrawal Strategies Can Stretch Your Savings

Here are four common withdrawal strategies that can help make your savings last for a more comfortable retirement.

4% Rule

How does it work? The 4% rule is a popular retirement withdrawal strategy that involves withdrawing 4% of your total retirement savings during your first year of retirement. In subsequent years, you adjust the withdrawal amount for inflation, ensuring that your spending power remains consistent. This rule was developed based on historical market performance and is designed to help retirees avoid depleting their savings over a 30-year period.

Who should use it? The 4% rule works well for retirees who have a moderate risk tolerance and are comfortable maintaining a diversified investment portfolio . However, be prepared to adjust your spending during periods of extreme market volatility.

Fixed-Dollar Strategy

How does it work? The fixed-dollar strategy involves withdrawing a specific, predetermined amount from your retirement savings each year, regardless of market performance. This approach offers simplicity and predictability, making it easy to plan your annual budget. However, the fixed-dollar amount doesn’t account for inflation, which may decrease your purchasing power.

Who should use it? This strategy is best suited for retirees with stable income from pensions or Social Security who want a predictable supplement from their savings.

Total Return Strategy

How does it work? The total return strategy focuses on maintaining a diversified investment portfolio that creates an income stream in retirement through a combination of interest, dividends and capital gains. Retirees withdraw a certain percentage based on their portfolio's total returns, adjusting the amount each year based on market performance. This strategy is more flexible and can help extend the life of your savings, but it requires active management and a higher risk tolerance.

Who should use it? It’s ideal for retirees who are comfortable with market fluctuations and are willing to adjust their withdrawals in response to investment performance.

Bucket Strategy

How does it work? The bucket strategy divides your retirement savings into three separate "buckets" based on time horizons: short-term, mid-term and long-term. The short-term bucket contains cash or low-risk investments to cover immediate expenses, while the mid-term and long-term buckets have higher growth potential. And, as you draw down funds from the short-term bucket, you replenish it with gains from the other buckets.

Who should use it? This strategy provides stability and growth potential, making it suitable for retirees who want to balance income needs with the potential for long-term investment growth.

How to Choose the Right Retirement Withdrawal Strategy

When it comes to choosing the right retirement withdrawal strategy, it can help to consider the factors that impact your financial needs and goals, such as:

• Life expectancy : Consider your health, family history and lifestyle when estimating your life expectancy. If you expect to live a long life, you'll need a strategy that ensures your savings last. Those with a longer life expectancy may benefit from more conservative withdrawal rates, while those with shorter horizons might be able to withdraw more aggressively.
• Required minimum distributions (RMDs): Once you reach age 73, you're required to start taking RMDs from certain retirement accounts, such as traditional IRAs and 401(k)s . Failure to take RMDs can result in hefty penalties, so be sure to incorporate RMDs into your withdrawal strategy.
• Taxes: Different retirement accounts have varying tax implications. For example, withdrawals from traditional IRAs and 401(k)s are taxed as ordinary income, while Roth IRAs offer tax-free withdrawals. Understanding the tax implications of your withdrawals can help you optimize your strategy.
• Social Security and pension benefits: Consider how your Social Security and pension benefits will impact your overall retirement income. If these benefits cover a significant portion of your expenses, you may have more flexibility with your withdrawal strategy. Conversely, if you rely heavily on your portfolio, you’ll need a retirement withdrawal strategy that can stretch your savings.

Bottom Line

Selecting a retirement withdrawal strategy is an important step that could help your savings last a lifetime. Make sure to prioritize your needs, like housing and healthcare, before wishlisting things like hobbies and vacations. Balancing your financial needs with your risk tolerance and different withdrawal strategies can help you develop a sustainable plan.

Tips to Help You Save for Retirement

• A financial advisor can help you build a long-term retirement plan. Finding a financial advisor doesn't have to be hard. SmartAsset's free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you're ready to find an advisor who can help you achieve your financial goals, get started now .
• Social Security benefits alone won't be able to support your current lifestyle. However, they can certainly help with your living expenses in retirement. Try SmartAsset's Social Security calculator to see how much of a benefit you can expect.
• If you want to know how much your retirement savings can grow over time, SmartAsset's free retirement calculator can help you get an estimate.

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