Withdrawal Strategies

Withdrawal Strategies — Turning Retirement Savings Into Retirement Income


Withdrawal Strategies — Turning Retirement Savings Into Retirement Income

Your investment objectives change at retirement. This is a time of transition from accumulating retirement savings to spending retirement savings. Now the challenge is not how much can you save, but where your income will come from and how long will it last.

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

Account TypeExampleAdvantagesDisadvantages


Roth IRA

  • Tax-free withdrawal of
    contributions at retirement.
  • Qualified withdrawals are federal income tax free as long as the criteria for a "qualified
    distribution" are met.1
  • Catch up contributions
    available if over 50
  • No tax deduction for
  • Qualified withdrawal guidelines are restrictive.
  • 10% penalty on withdrawals prior to age 59 ½
  • Annual contribution limits


Brokerage Account

  • No limit on contribution amount.
  • Could receive favorable tax treatment of long term capital gains.
  • Withdrawals can be taken at any time with no tax penalty.
  • No tax deduction for contributions.
  • Investments may produce income through dividends and interest during accumulation years when not wanted.
  • Short- or long-term capital gains tax may be due at withdrawal.


Traditional IRA or 401(k)

  • Contributions are tax deductible. When taken, withdrawals will be taxed as ordinary income.
  • Potential for tax-deferred growth until withdrawal.
  • Catch up contributions available if over 50.
  • Annual dollar limits on contributions.
  • 10% penalty on withdrawals prior to age 59 ½
  • In some cases income may limit the allowable contribution amount.

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.

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.