What are retirement withdrawal strategies?

Some retirement withdrawals are involuntary. For example, an individual retirement account (IRA) and a 401(k) require minimum distributions at a set time in your life. But other options, such as fixed-dollar or fixed-percentage withdrawal plans, allow you to choose when and how you make withdrawals.

Consider these withdrawal rules:

Or jump to one of these withdrawal strategies:


Retirement withdrawal rules

Each kind of retirement savings account has its own withdrawal rules. Particularly, withdrawals from 401(k)s are very different Traditional and Roth IRAs.

When can I start withdrawing money from my IRA?

You can start to make penalty-free withdrawals from your IRA when you turn 59 ½. If you need to access your funds before then, you can make an early withdrawal, but you’ll incur an additional 10% early withdrawal tax penalty, unless an exception applies.

When do I have to start making withdrawals from my IRA?

You can’t keep your funds in a retirement account indefinitely. Generally, you’re required to start taking withdrawals from your traditional IRA when you reach age 72 (unless you’re still working, under some plans). Roth IRAs, however, don’t require withdrawals until the owner of the account dies.

The amount that you’re required to withdraw is called a required minimum distribution (RMD). You can withdraw more than the RMD amount, but withdrawals from a Traditional IRA are included in your taxable income. If you fail to make withdrawals that meet the RMD standards, you may be subject to a 50% excise tax. Roth IRAs do not require RMDs. Your money grows tax-free, since contributions are made from after-tax dollars, and your withdrawals in retirement aren't taxed.

When can I start withdrawing money from my 401(k)?

With a 401(k), you can start to make penalty-free withdrawals when you turn 59 ½. If you need access to your funds before then, you can make an early withdrawal, but you’ll incur an additional 10% early withdrawal tax penalty, unless an exception applies.

When do I have to start making withdrawals from my 401(k)?

You’re required to start taking RMDs from your 401(k) when you reach age 72 (unless you’re still working, under some plans). Once you start taking RMDs, your withdrawals will be taxed as ordinary income.

How does SECURE 2.0 impact RMDs?

SECURE 2.0 was signed into law in late 2022 and is one of the most significant pieces of retirement legislation. Before the legislation was signed into law, you were required to start making retirement withdrawals at 72. Starting in 2023, you can now wait until 73, and in 2033 this will increase to 75.

Retirement withdrawal strategies

Whether you’re invested in an IRA, a 401(k) or another type of plan, you can establish a strategy for withdrawal designed to provide the income you need to fund your retirement. Consider:

What is the 4% withdrawal rule?

The 4% rule is when you withdraw 4% of your retirement savings in your first year of retirement. In subsequent years, tack on an additional 2% to adjust for inflation.

For example, if you have $1 million saved under this strategy, you would withdraw $40,000 during your first year in retirement. The second year, you would take out $40,800 (the original amount plus 2%). The third year, you would withdraw $41,616 (the previous year’s amount, plus 2%), and so on.

Potential advantages: This has been a longstanding retirement withdrawal strategy. Many retirees value this strategy because it’s simple to follow and gives you a predictable amount of income each year.

Potential disadvantages: Lately, this approach has been criticized for not considering the effects of rising interest rates and market volatility. Indeed, if you retire at the onset of a steep stock market decline, you risk depleting your savings early.

What are fixed-dollar withdrawals?

Some retirees take out a fixed dollar amount over a specific period of time. For example, you might decide to withdraw $40,000 annually and then reassess the dollar amount at the end of a five-year period. While this provides predictable annual income (which can help you budget accordingly), it doesn’t do much to protect against inflation; and depending on the dollar amount you choose, you could erode your principal. Moreover, if your investments are down in value due to market volatility, you may need to sell more of your assets to meet your withdrawal needs.

Potential advantages: This approach can simplify your personal money management. If you arrange a fixed-dollar withdrawal from an IRA account, federal taxes can be automatically withheld.

Potential disadvantages: This approach doesn’t protect against inflation; for example, $40,000 may not have the same purchasing power from one year to the next. Additionally, in a down market, you may have to liquidate more assets to meet your fixed-dollar withdrawal.

Fixed-dollar withdrawals chart.

For illustrative purposes only.

What are fixed-percentage withdrawals?

Another approach is to withdraw a set percentage of your portfolio annually. The dollar amount of the distribution will vary, based on the underlying value of your portfolio. While this method creates a certain amount of uncertainty, if you choose a percentage below the anticipated rate of return, you could actually grow your income and account value. On the other hand, if the percentage is too high, you risk depleting your assets prematurely.

Let’s say you have a portfolio of $1 million dollars, and you decide to take out 4% every year. That gives you $40,000 to spend for the year.

Potential advantages: This approach is a simple formula to follow.

Potential disadvantages: The 4% you decide to withdraw is unlikely to equal the same amount each year. The pool of money you’re drawing from may grow or shrink every year, so you may not get a consistent annual income.

Fixed-percentage withdrawals chart.

For illustrative purposes only.

What is a systematic withdrawal plan?

In a systematic withdrawal plan, you only withdraw the income (such as dividends or interest) created by the underlying investments in your portfolio. Because your principal remains intact, this is designed to prevent you from running out of money and may afford you the potential to grow your investments over time, while still providing retirement income. However, the amount of income you receive in any given year will vary, since it depends on market performance. There’s also the risk that the amount you’re able to withdraw won’t keep pace with inflation.

Potential advantages: This approach only touches the income – not your principal – so your portfolio maintains the potential to grow.

Potential disadvantages: You won’t withdraw the same amount of money every year, and you might get outpaced by inflation.

Withdrawal of investment earnings chart.

For illustrative purposes only.

What is a withdrawal “buckets” strategy?

With the “buckets” strategy, you withdraw assets from three “buckets,” or separate types of accounts holding your assets.

Under this strategy, the first bucket holds some percentage of your savings in cash: often three-to-five years of living expenses. The second holds mostly fixed income securities. The third bucket contains your remaining investments in equities. As you use the cash from the first bucket, you replenish it with earnings from the second and third buckets.

By setting aside several years' worth of living expenses, your investments ideally would have more time to grow, sustaining as much of your savings as you can for as long as possible.

Potential advantages: This approach allows your savings to continue to grow over time. Through constant review of your funding, you also benefit from a sense of control over your assets.

Potential disadvantages: This approach is more time-consuming.

Mix and match

You can mix and match the above approaches to arrive at the optimal income plan for your circumstances. As you think through what your major expenses are likely to be in retirement, you can combine investment strategies and fund your various income needs separately.

Retirement spending calculator

The LifePath® Spending Tool is designed to help retirees estimate retirement spending potential. With just three simple inputs – Current Age, Current Savings, and Portfolio Equity Allocation – retirees can see estimated spending potential in the current year, plus savings and retirement spending estimates over time. Unlike many other retirement spending strategies, the LifePath Spending Tool incorporates life expectancy estimates and long term views on potential market performance. Additionally, retirees can enter a Social Security estimate to get a more holistic view of potential retirement income.

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