Retirement withdrawal strategies to make your money last

Retirement savings are not built overnight — many people spend years, or decades, saving for retirement. When the time comes to retire, it is important to have a financial strategy in place to ensure you get the most out of your hard-earned money. 

A retirement withdrawal strategy is a planned approach for taking money out of your retirement savings — including IRAs, 401(k)s, other investments, and alternative investments — once you stop working. Retirement withdrawal strategies are part of retirement decumulation — the phase in retirement where you begin strategically spending rather than accumulating savings.

Planning for retirement includes more than just making contributions to different accounts. In order to maximize your retirement funds, maintain the lifestyle you please, and ensure you have enough money to do so, you need to consider how to approach your retirement withdrawals. 

The goal of a retirement withdrawal strategy is to make your money last through retirement, minimize taxes and penalties, cover your living expenses, and protect you against inflation and possible market downturns. 

A good retirement withdrawal strategy considers aspects such as: 

• Your annual spending budget

• Which accounts to withdraw from first (e.g. Roth IRA vs. traditional IRA or 401(k) accounts)

• How market fluctuations may affect your withdrawals

• Required minimum distributions (RMDs)

• Your age and life expectancy

• Ensuring you have enough money if you plan to leave money as an inheritance

Essentially, withdrawal strategies for retirement aim to balance income, risk, and taxes so you have enough money to last through retirement. Let’s explore some of the most common retirement withdrawal strategies to help you efficiently plan ahead.

Planning a retirement withdrawal strategy may be the first step towards managing your funds throughout retirement. However, since everyone has their own unique financial situation, you might have to weigh in different factors that may affect your specific goals and needs. 

Therefore, if you are asking yourself, “What are the best retirement withdrawal strategies?,” the answer may be underwhelming: it depends. Nevertheless, we can still give you useful tips and information to figure out what strategy would be most ideal for you. 

Here are some common retirement withdrawal strategies you can consider.

The 4% rule is one of the most widely used retirement withdrawal strategies. This rule goes as follows: you withdraw 4% of your retirement savings in the first year of your retirement, and then scale that amount to account for inflation for every subsequent year. 

For example, you could add on an additional 2% in the second year if that is enough to account for inflation. 

This rule is particularly popular as it works in most markets and is a simple rule-of-thumb method to understand and follow. 

However, it is also important to note that this strategy is generally based around a 30-year retirement window, meaning you will have to adjust your withdrawal rate if you have a shorter or longer retirement.  

Potential advantages: Easy to follow, historically sustainable. 

Potential disadvantages: May not be flexible enough in volatile markets or for longer retirement.

Figuring out how much to withdraw from your portfolio is only the first step, but determining which assets to withdraw from may be a bit more challenging. The bucket strategy is a popular technique to manage retirement withdrawals for retirees who want a mix of stability and growth, while having a visual and organized approach. 

The bucket strategy works by dividing your retirement savings into “buckets” based on three major time horizons — short-term, medium-term, and long-term. 

• Short-term buckets focus on money you need to cover up to the first three years, and are typically liquid, cash savings. The goal is to have traditionally safe, liquid assets, which may include options like high-yield savings accounts, certificates of deposit (CDs), money market accounts, or even short-term bonds. 

• Medium-term buckets aim to cover the cost of living for the next four to seven years. You can aim for moderate-risk investments such as bonds, dividend-paying stocks, and conservative balanced funds. 

• Long-term buckets should hold investments for the following eight plus years, with the aim to grow and replenish the other buckets throughout your retirement. This bucket can hold higher-risk investments, such as stocks, exchange-traded funds (ETFs), mutual funds, and other diversified funds, since it may have more time to recover from possible market downturns. 

However, you should still be aware of risks of loss when choosing your investments. You may want to consider investments with good returns. 

This strategy can help retirees have peace of mind by separating short-term security from long-term growth. 

Potential advantages: May help manage risk and smooth out market volatility.

Potential disadvantages: Requires ongoing rebalancing and management, may hinder investment growth for short-term savings.

If you have a traditional IRA or 401(k), you will also have to withdraw the IRS-mandated minimum from your accounts starting at age 73. This is known as your required minimum distribution, or RMD, and is taxed as ordinary income — assuming contributions were made on a pre-tax basis. 

RMDs may also play a role in your retirement distribution strategy if you have traditional retirement accounts, since they are required. 

You may face penalties if you do not take the minimum withdrawal amount. 

If you don’t need your RMDs to cover living expenses, you can also consider reinvesting them to help offset some of the taxes, and contribute to your long-term savings. 

Potential advantages: Helps avoid IRS penalties. 

Potential disadvantages: Doesn’t offer flexibility — withdrawals are mandatory even if you don’t need the money.

The dynamic withdrawal strategy is a flexible approach to retirement income withdrawal strategies, allowing you to adjust your yearly withdrawals based on market performance and personal spending needs. 

This strategy is a bit more flexible than the 4% rule, as it builds on people’s tendency to adjust spending based on market performance. 

Using this strategy, you would set a target withdrawal rate, being the amount of money you plan to take out of your retirement investments each year. You would also set a “ceiling” to cap this limit, as well as a “floor,” or lower end to your limit. 

If your withdrawal rate exceeds your ceiling, then you may want to reduce your withdrawal amount. On the other hand, if your withdrawal rate is below your floor, then you could potentially increase the amount you withdraw. 

Managing your retirement withdrawals with this strategy may be more suitable for higher-net-worth retirees with more discretionary income, as it may not provide a steady flow of income if the market is down. 

This method may also be more appealing to those who want flexibility and are comfortable making lifestyle adjustments based on market conditions. 

Potential advantages: Can help savings last longer during down markets.

Potential disadvantages: Requires careful planning, monitoring, and understanding market conditions.

It is important to consider your personal needs and goals to ensure you make the most of your money during retirement. Doing so can help you better choose a retirement withdrawal strategy, or a combination of different methods, to help you stay financially organized. 

Here are some additional factors to consider when planning your retirement withdrawal strategy: 

• Taxes: If you receive Social Security or annuity benefits, withdraw from a traditional IRA, 401(k), or other tax-deferred retirement account during your retirement, you will owe taxes on this income. Make sure you consider the tax payments in your strategy, or consult a tax specialist, as these taxes may not be automatically withheld.. 

• Life expectancy: To ensure you do not outlive your money, you may want to plan as if you’ll live longer than expected.

• Healthcare and long-term care costs: Since Medicare does not cover everything, you may want to consider additional healthcare costs or potential long-term care needs. You can look into supplemental insurance or allocate funds for medical expenses as part of a broader emergency fund. 

• Social Security benefits: Delaying Social Security benefits can potentially increase your monthly benefits. You may want to weigh the trade-off between taking benefits earlier versus using your retirement savings to delay Social Security benefits. 

• Legacy and estate planning: You may want to consider which accounts to prioritize for withdrawals if you want to leave money to any heirs or charities. Our guides to estate planning or estate planning for women can help you get started with planning your legacy. 

Planning withdrawal strategies in retirement involves many steps. Since several different factors can affect your savings, it may be sensible to plan ahead. 

You also want to ensure you have enough funds to last throughout your retirement.

If you want to maximize your income stream during retirement, or ensure you have some sort of additional income during retirement, you may want to consider building a retirement income strategy alongside your withdrawal strategy. 

Turning your savings, investments, and benefits into a steady income can help you have a more comfortable retirement. 

To see how to make the most of your retirement funds, turn to our guide to retirement income strategies.

When considering withdrawal strategies for retirement, it's important to ensure you will have enough funds to last throughout your retirement. If you’re looking to supplement your retirement savings, or want to have a flexible and secure savings option for your short-term retirement plans, Raisin can help you achieve your goals. Choose from a variety of high-yield savings products to strengthen your savings or help provide an additional cash reserve. Explore different banks and competitive interest rates, all in one portfolio, and start boosting your retirement savings today.

The above article is intended to provide generalized financial information designed to educate a broad segment of the public; it does not give personalized tax, investment, legal, or other business and professional advice. Before taking any action, you should always seek the assistance of a professional who knows your particular situation for advice on taxes, your investments, the law, or any other business and professional matters that affect you and/or your business.