Retiring This Year? Here Are 4 Retirement Withdrawal Strategies to Consider
You've been building up your retirement savings over decades, and now it's time to start withdrawing those savings. If your retirement comes from a mixture of Social Security benefits, 401(k) account funds, Individual Retirement Account (IRA) balances, and taxable investment accounts, planning your retirement withdrawal strategies can help you tap the right assets at the right time — and perhaps even extend the life of your savings. Here are four strategies to consider.
1. The 4% Rule
One frequently used retirement withdrawal strategy is the 4% Rule, also known as the Rule of Four. This rule was created by a financial advisor in the 1990s, based on historical data on stock and bond returns. It's supposed to carry a low risk of running out of money1 over a 30-year retirement.
One reason for its popularity is its simplicity: Upon retirement, you add up all your investments and withdraw 4% of that amount during your first year of retirement.2
The following year, you adjust the amount you withdraw to account for inflation. For example, if your retirement portfolio is worth $1 million when you retire, you withdraw $40,000 (4% of $1 million) in the first year. If inflation is 3% that year, the following year, you withdraw $41,200 ($40,000 x 1.03).
The 4% Rule isn't without its flaws. For example, it assumes a retiree's portfolio contains 60% equities and 40% bonds and was developed when bonds paid higher returns. Also, if inflation is high for an extended period, you can also be at risk of running out of money during your lifetime.
2. Fixed Percentage Withdrawals
A fixed percentage withdrawal strategy is similar to the 4% Rule, but instead of withdrawing 4% of your first-year balance and adjusting that amount annually for inflation, you withdraw a percentage of your account balance each year.3
For example, say you decide to withdraw 4% per year. Your portfolio balance is $1 million in year one, so you withdraw $40,000. In year two, investment returns brought your portfolio up to $1.1 million, so you take out $44,000 ($1.1 million x 4%), and so forth.
Using a fixed percentage is popular because it automatically adjusts your withdrawals to respond to market fluctuations and limits the risk of running out of money. When the market is doing well, you withdraw more. In years with a down market, you withdraw less. While this helps you avoid running out of money, it could leave you with less than you need in years where the market is down.
Make sure you're tapping your retirement funds at the right time — withdrawals before age 59½ can result in IRS penalties.
3. Fixed Dollar Withdrawals
With fixed dollar withdrawals, rather than tapping a percentage of your retirement account balances each year, you withdraw a fixed dollar amount every month or year,4 and reassess the dollar amount every few years.
For example, you might decide to withdraw $40,000 per year for the first five years because that's how much you need to cover your everyday expenses. When that timeframe is up, you might increase that amount if inflation makes it tough to live on $40,000 per year — or if the market is doing well and you'd like to increase your standard of living. You could also opt to withdraw less if you decide you don't need the entire $40,000.
The benefit of taking fixed dollar withdrawals is that you have a predictable income, and you can base your withdrawals on the amount you need to live comfortably during retirement. Of course, if you select a fixed withdrawal amount that is too high, you run the risk of running out of money. It's best to consult with a financial planner to make sure the amount you choose to withdraw is sustainable.
4. Systematic Withdrawal Plan
In a systematic withdrawal plan, you only withdraw dividends and interest income generated by your investment portfolio, leaving the principal intact.
For example, if your retirement portfolio generated investment returns of $40,000 in year one and $51,000 in year two, you withdraw $40,000 and $51,000 per year, respectively.
This retirement withdrawal is the safest strategy because you don't touch your principal. However, in years where investment returns are low, you have less money to live on.
Final Consideration: 401(k) Withdrawal and IRA Withdrawal Rules
Whatever withdrawal strategy you choose, keep in mind that IRAs, 401(k)s, and other tax-deferred retirement accounts have required minimum distributions (RMDs). An RMD is a mandated amount of money you must withdraw from your account each year once you reach age 72 (age 70½ if you reached that age before or during 2019).5
If you fail to take your RMDs, you could face stiff penalties — a 50% tax on the difference between what was required and what you withdrew. When calculating your retirement withdrawals, be sure to withdraw at least your RMD amount. The remainder, if any, can be withdrawn from your non-retirement accounts.
In addition to withdrawing enough to avoid penalties, you want to ensure you're tapping your retirement accounts at the right time. In general, if you start taking withdrawals before the age of 59½, the IRS imposes a 10% penalty.
There are a handful of exceptions,6 so make sure you meet one of those exceptions if you plan to start taking withdrawals before age 59½.
Note that there are no RMDs for Roth IRAs,7 but Roth 401(k) accounts are subject to the same RMD rules that apply to traditional 401(k) accounts.
Planning Your Retirement Withdrawal Strategies
Withdrawal strategy has its pros and cons, and there's no one hard and fast "rule" that works best for every individual. If you're approaching retirement and want to find the optimal plan for your circumstances, consult your Synovus financial advisor. They may recommend one of the above strategies or a combination of two or more. Either way, being productive about your retirement planning can help ensure you're on the best path to meet your financial goals.
Important disclosure information
This content is general in nature and does not constitute legal, tax, accounting, financial or investment advice. You are encouraged to consult with competent legal, tax, accounting, financial or investment professionals based on your specific circumstances. We do not make any warranties as to accuracy or completeness of this information, do not endorse any third-party companies, products, or services described here, and take no liability for your use of this information.
- Jessica Blankenship, "What Is the 4% Rule for Retirement Withdrawals?" Bankrate, published April 22, 2022, accessed May 17, 2022. Back
- Rob Berger, “What Is the 4% Rule for Retirement Withdrawals?" Forbes, updated May 20, 2020, accessed April 25, 2022. Back
- Bogleheads.org, “Withdrawal Methods," updated October 25, 2021, accessed April 25, 2022. Back
- BlackRock, “What Are Retirement Withdrawal Strategies?" accessed April 25, 2022. Back
- IRS.gov, “Retirement Topics — Required Minimum Distributions(RMDs)," updated May 3, 2021, accessed April 25, 2022. Back
- IRS.gov, “Retirement Topics – Exceptions to Tax on Early Distributions," updated April 7, 2022, accessed April 25, 2022. Back
- IRS.gov, "Retirement Plan and IRA Required Minimum Distribution FAQs," updated March 16, 2022, accessed May 17, 2022. Back
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