Sarasota, FL / Bradenton, FL

Five Retirement Withdrawal Strategies

Nobody wants to run out of money in retirement. Unfortunately, it’s a very real fear, especially considering that the average amount of years spent in retirement has skyrocketed. Previous generations could envision just a few years in retirement and social security combined with a company pension was usually enough.
Nowadays, retirees have to prepare for a potentially very long retirement, perhaps (and hopefully!) thirty-plus years. Even if you have carefully saved and invested your whole life, there is a chance that you will experience a shortfall later in your life if you withdraw too much too quickly from your savings. Conversely, you may not enjoy the retirement you expected if you take too little out.
Below are five retirement withdrawal strategies designed to help you make the most out of your retirement.

Retirement Withdrawal Strategy #1: The 4% Rule

This is one of the most common strategies, and one of the most straightforward. In your first year of retirement, you withdraw 4% of your portfolio’s value or another percentage of your choosing. You can go more conservative with 3% or 3.5%, or, if you’re confident enough, choose a more aggressive percentage. Whatever percent you choose should be enough to pay not only your living expenses but also for traveling, entertainment, or any other discretionary expenditures. For each following year, you take the original amount adjusted for inflation.
Example: You have $1,000,000 spread out across a variety of investments. According to the 4% rule, you withdraw $40,000 in the first year. In year two, there is a 3% inflation rate, so you withdraw $40,000 + 3%, for a grand total of $41,200.
Pros: It’s very simple and straightforward and recommended by many financial professionals. Its conservative approach coupled with keeping expenses low nearly ensures a lifelong retirement account.
Cons: It is inflexible to market fluctuations. If markets are way up, perhaps you can afford to take a bit more out than your first year in retirement. If there is a market downturn, it might be an expensive idea to take out as much as you did your first year (plus inflation). Also, it may not take into account tax burdens – when you first retire, you may be withdrawing taxable income, so you will end up with less than 4% of your portfolio’s value. If you take taxes into account, then tax-free accounts will complicate things once you start withdrawing from them later on in retirement.

Retirement Withdrawal Strategy #2: Fixed-dollar Strategy

Even more cut and dry than the 4% rule is the fixed-dollar strategy. You simply set a yearly withdrawal amount for a fixed amount of years and then reassess after that time has passed.
Example: You determine you need $50,000 in your first years in retirement. You withdraw $50,000 each year for, say, 5 years. You then reassess the amount of money you need per year, whether it be more or less.
Pros: It is very easy to fix a budget knowing exactly how much you will withdraw each year.
Cons: Inflation will eat away at your purchasing power over the years. If inflation is at 4%, you would need $61,000 to keep up with inflation at the end of your 5-year period. Also, similar to the 4% rule, if markets are down you will need to sell a greater proportion of your investment assets to make up for the loss, potentially depleting your portfolio faster than expected.

Retirement Withdrawal Strategy #3: Fixed-percentage withdrawals

Similar to the 4% rule, you choose a percentage and withdrawal it from your portfolio’s overall value. The next year, however, you take exactly 4% out again, plus inflation. It doesn’t matter if your portfolio has gained or lost value – you still take 4%.
Example: Your nest egg is worth $2,000,000. You take out 4%, leaving you with an $80,000 income (minus taxes if applicable) and your portfolio is now worth $1,920,000. Markets rise, and the next year your portfolio is worth $2,100,000. Congratulations, your income is now $84,000 for the year and you have $2,016,000 leftover. But then things take a turn for the worse – markets plunge and your portfolio balance is now worth only $1,814,400. Your yearly income is only $72,576. Not bad, but it could be much worse.. And now, you are only left with $1,741,824. It will be difficult to recover from such a blow.
Pros: Your portfolio’s value will directly reflect the condition of the market. If the market is up, your income is up – if it’s down, your income will be down. Also, your portfolio, technically, will never drop to zero dollars.
Cons: The sequence of returns risk can have devastating effects on a fixed percentage portfolio. You may end up with too small of an income, especially if you choose too great of a withdrawal percentage. Due to market volatility, you may find it difficult to establish a yearly budget.

Retirement Withdrawal Strategy #4: Systematic Withdrawals

A systematic withdrawal plan involves living off the dividends and interest your investments produce. Your principal will be untouched, allowing it to further grow, though it will lose the power of compounding. If your retirement portfolio is large enough, a systematic withdrawal plan may be suitable for you.
Pros: You will never run out of money and you will have an emergency fund to tap into later in life if necessary.
Cons: Unless you have a very substantial nest egg, you may find your yearly income lacking and it may not keep up with inflation. To receive a $100,000 yearly income, you would need $2,500,000 perpetually invested with a 4% rate of return.

Retirement Withdrawal Strategy #5: The 3-Bucket Strategy

This strategy involves putting money into a general savings account and two investment accounts. Bucket 1 consists of liquid cash stored in a savings account of the money you will need for the next 12 months. Bucket 2 is a medium-term investment account with a conservative slant. It consists of income-producing short-term bonds and high-yield CDs that will mature in 7-10 years. Finally, Bucket 3 consists of long-term growth investments, such as stocks, mutual funds, and ETFs.
A 3-bucket allows for greater flexibility in the long term. You can draw from each bucket as necessary, or ‘pour’ funds from one bucket to another. For example, when you retire you can transfer funds from your medium-term bucket to your short-term savings account, and pour some of your long-term funds into the medium-term bucket. This approach will help protect you from market volatility with buckets 1 and 2, though limit your growth potential, as only a portion of funds will be in bucket 3, which has the greatest room for growth.
If you’d like to discuss any of the above strategies, get in touch with us today. We can determine what strategy would work best for your financial situation while taking into account your investment horizon, risk tolerance, and tax burden.

About the Authors

  • Douglas Walters

    Doug is the Managing Partner of Walters Strategic Partners, LLC, a licensed Registered Investment Advisory firm. Doug is a licensed Certified Public Accountant (CPA) in the state of Florida and holds a Series 65 Investment Advisor Representative securities license. He is also a member of the AICPA. With over 28 years of experience as a CPA, he believes investment decisions should be based on decades of peer-reviewed research rather than relying on the latest “hot tip” from media outlets. This empirical evidence puts the science of investing to work for his clients.

  • Joshua Pisa

    Joshua M. Pisa is the Director of Wealth Management at Walters Strategic Advisors, LLC. As a member of the firm’s Wealth Management team, Josh’s responsibilities involve comprehensive wealth management, tax consulting, planning, and compliance services. He has over 15 years of industry knowledge specializing in solving the unique issues his clients encounter. Josh has experience in wealth management and individual taxation, trusts and estates, family partnerships, and other privately held businesses.