Withdrawal Strategies — Turning Retirement Savings Into Retirement Income
Income from investments
You can generate an investment income stream in several ways:
Beyond these streams of retirement income, you can take periodic lump sum withdrawals from your accounts to cover one-time expenses or special needs.
Setting a withdrawal rate
Before starting withdrawals from your retirement accounts, first organize and manage your expenses. The first step in managing expenses is setting up a household budget to help you understand the amount of income you need. Then, take an inventory of your anticipated income from Social Security, pensions and other guaranteed income sources.
Many experts suggest limiting retirement savings withdrawals to around 4 percent a year.
When taking money from your tax-deferred retirement accounts, like IRAs and 401(k) plans, experts often suggest a withdrawal rate of about four percent a year. It’s tough to rely on a blanket recommendation because everyone’s situation is different. The actual percentage you can safely withdraw each year depends on how much you’ve saved, how much it earns, and how many years you’ll need your income to last.
Nothing says you have to withdraw the same amount every year throughout retirement. Your retirement lifestyle may be such that you withdraw a larger percentage in the early retirement years when you are more active. Then take a lower withdrawal rate as retirement activity and spending tapers off. Or, go slow with withdrawals early in retirement and then gradually increase the rate as confidence in the sustainability of your savings increases.
Prioritizing your withdrawals
You may have money in taxable accounts such as brokerage accounts, CDs and mutual funds, tax-deferred accounts such as traditional IRAs and 401(k)s, and tax-free accounts such as Roth IRAs and Roth 401(k)s.1 So which accounts do you tap first? It can be complicated. This is where a financial professional can really help.
If you are not concerned about leaving money to heirs, it makes the most sense to spend down your accounts in the following order: tax-free, taxable, and last tax-deferred. This strategy postpones income taxes longer and keeps more of your money potentially growing tax deferred.1
Traditional IRA or 401(k)
If you’d like to leave a legacy, you’ll want to coordinate your withdrawals with your estate planning decisions. For example, spouses get preferential tax treatment when they inherit retirement plan assets, so it may make sense for married couples to delay tax-deferred withdrawals.2
Professional planning may help
Withdrawal decisions are complex. Making the wrong decision could be costly—in taxes, current income and longterm sustainability. Because there are so many considerations, it may be best to develop a withdrawal strategy with the help of a financial professional.
You may also like
1 Distributions from a Roth account are federal income tax free as long as the criteria of a “qualified distribution" is met (as long as you've satisfied the 5 year holding period; and are age 59 ½ or older, disabled or deceased).
2 For illustrative purposes only. This is not intended as investment or financial planning advice. Your situation may call for a different strategy. Please consult with a financial professional before making withdrawal decisions.