Saving enough money is half the battle for a comfortable retirement. After years of diligently building up your nest egg, your next hurdle is ensuring that your money lasts. Unlike in the accumulation phase where your contributions and compounding work in your favor, the withdrawal phase demands careful planning and strategy. You wouldn’t want to risk depleting your assets too early or paying more in taxes than necessary.
This article explores five actionable tips that can help you maximize your retirement income and sustain you for the long haul.
1. Start With A Conservative Withdrawal Rate
Withdrawal rate refers to the percentage of your total retirement savings that you take out as income per year. There is no one-size-fits-all amount but you should consider your life expectancy, risk tolerance, other income sources, and the market conditions when determining the appropriate rate.
Experts suggest to be conservative with your withdrawals during the first year. For example, the 4% rule suggests that if you withdraw 4% of your retirement portfolio in the first year and adjust annually for inflation, your money should last about 30 years, assuming you have a balanced portfolio of stocks and bonds. Depending on your circumstances, you can go higher or lower. Say you are retiring at 60, you can start at a 3.5% withdrawal rate, or if you plan to retire at 70, you could safely go higher.
What’s most important here is to be adaptable. Static withdrawal rates cannot account for market fluctuations or changing personal expenses. Consider strategies like withdrawing less during down markets or capping increases during bull markets. Always be mindful of changing circumstances and adjust accordingly.
2. Sequence Your Withdrawals
The order of withdrawals should also carefully be planned, not just the amount. Consider which accounts you draw from first and your timing based on market conditions and your liquidity requirements. Coordinate these elements so you can maximize wealth preservation, tax efficiency, and income stability throughout your retirement.
For example, a typical strategy for tax-efficient withdrawals is to draw from taxable brokerage accounts first, followed by tax-deferred accounts like traditional 401(k)s and IRAs. This allows you to take advantage of favorable capital gains rates early on while deferring ordinary income taxes from traditional accounts. Roth accounts, with tax-free withdrawals and no required minimum distributions (RMDs), are best saved for as long as possible, to be tapped last.
You may also use a bucket strategy, where you segment your assets based on purpose and liquidity. The first bucket should contain cash or cash equivalents for immediate living expenses for the first two years of retirement. The second bucket should contain intermediate-term investments such as bonds and other income-generating assets, to be used in years three to five. The third bucket should include equities and other growth-oriented securities which you will use long-term spending needs. Again, you should always be flexible. For example, in years when markets decline, you can draw from your cash bucket to avoid selling equities at a loss. When markets rebound, you can rebalance by harvesting gains from growth assets and replenishing your cash bucket.
3. Delay Social Security If Possible
Social Security is one of the few guaranteed, inflation-adjusted retirement income sources for Americans. You are eligible to receive benefits as early as age 62, but claiming at that age results in a permanent reduction in monthly benefits of about 25% to 30% less than what you would receive at full retirement age (66 to 67, depending on your birth year).
Delay taking Social Security benefits beyond full retirement age if you can. It will lead to an 8% annual increase in your monthly benefits, up to age 70. This delayed retirement credit can significantly enhance your lifetime income. For example, a $2,000 per month FRA benefit can grow to approximately $2,640 by waiting until you are 70 years old, a 32% increase, excluding cost-of-living adjustments.
If you live well beyond your 80s or 90s, the cumulative advantage of delaying far exceeds the amount received by those who began early.
4. Prepare For RMDs
The SECURE Act 2.0 raised the RMD start age from 72 to 73 (and eventually to 75 in 2033). Once you reach this age, the IRS mandates that you begin withdrawing a minimum amount annually from your traditional retirement accounts, such as 401(k)s and IRAs. These withdrawals are treated as ordinary income and must be taken regardless of need. Failing to do so results in hefty penalties, which can reach up to 25% of the amount not withdrawn.
Plan your RMDs at least five years in advance. If you do not prepare for them, you may be forced to make large withdrawals that increase your taxable income, put you in a higher tax bracket, affect Medicare premiums, or reduce the tax efficiency of your portfolio. Worse, it may derail your entire retirement withdrawal strategy.
Consider drawing down your tax-deferred accounts in the years before RMDs start, especially during low-income periods, such as between retirement and the start of Social Security. You can also explore Roth conversions or using Qualified Charitable Contributions to mitigate RMDs. It’s best to consult a tax expert or professional financial advisor for more information and tailored advice.
5. Revisit Your Plan Every Year
Your withdrawal strategy must evolve as you age, the market changes, and your personal needs and goals shift. What works at age 65 may no longer be suitable when you’re 75 or 85. Review and adjust your withdrawal strategy and overall retirement plan at least once a year.
You can do this yourself or with the help of a financial advisor. Review and adjust based on your current spending and budget, the performance of your investments, your tax situation, projected RMDs and Social Security strategies, and other factors. Adjustments may also be needed after significant life transitions, such as the death of a spouse or the onset of illnesses.
Remember that the goal is not an overhaul of your entire retirement plan, but to make incremental changes to keep your strategy aligned with your circumstances, especially to avoid reactive decisions.
Final Thoughts
A carefully planned retirement withdrawal strategy can stretch your savings, smooth out your income, and reduce your tax burden over decades. Whether you’re entering retirement now or still a few years away, it’s never too early or too late to prepare.
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