Retirement withdrawal strategies & rules

The transition from saving for retirement to using those savings as actual retirement income can be a tricky one. Many people aren’t sure when to start making withdrawals. Others don’t know how much to withdraw – or how often.


If you find yourself with similar questions in mind, consider one of these withdrawal rules:

When to start withdrawing | Required minimum distribution

Or jump to one of these withdrawal strategies:

LifePath® Spending Tool | 4% withdrawal rule | Fixed-dollar | Fixed-percentage
Withdrawal of investment earnings | “Buckets” strategy


Retirement withdrawal rules

Withdrawal rules are specific to each kind of retirement savings account and can be fairly technical. Understand the nuances between withdrawals from 401(k)s and traditional and Roth individual retirement accounts (IRAs). Below, we outline some general points to help you get started.

When can I start withdrawing money from my account?

If you have a 401(k) or an IRA, 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?

You can’t keep your funds in a retirement account indefinitely. Generally, you are required to start taking withdrawals from your 401(k) and traditional IRA when you reach age 70 ½ (unless you are still working, under some plans). Roth IRAs, however, do not require withdrawals until the death of the owner.

The amount that you are required to withdraw is called a required minimum distribution (RMD). Of course, you can withdraw more than the RMD amount, but all withdrawals are included in your taxable income – except for Roth account distributions. If you fail to make withdrawals that meet the RMD standards, you may be subject to a 50% excise tax.


Withdrawal strategies

Looking to establish a withdrawal plan that will provide the income you need to fund your retirement? Here are a few strategies to consider.

LifePath® Spending Tool

The LifePath® Spending Tool is designed to help retirees easily estimate retirement spending. With just two simple inputs – age and current savings – retirees can see potential estimated retirement spending 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.

The 4% withdrawal rule

Here’s how it works: Withdraw 4% of your retirement savings balance the first year of your retirement. In subsequent years, tack on an additional 2% to adjust for inflation.

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

This has been a longstanding retirement withdrawal strategy since the 1990s. However, of late, this approach has been criticized for not taking into account 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. Still, many retirees value this strategy because it’s simple to follow and gives you a predictable income amount each year.

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 has the benefit of providing 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.

Fixed-dollar withdrawals chart.

For illustrative purposes only.

Fixed-percentage withdrawals

When you 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 approach creates a certain amount of uncertainty, if you choose a percentage that is 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.

Fixed-percentage withdrawals chart.

For illustrative purposes only.

Withdrawal of investment earnings

Under this strategy, you only withdraw the income (e.g. dividends, interest) created by the underlying investments in your portfolio. Because your principal remains intact, this prevents you from running out of money and affords you the potential to continue to grow your investments while still providing you with retirement income. That said, the amount of income you receive in any given year will vary, since it is dependent on market performance. And there is the risk that what you are able to withdraw will not keep pace with inflation.

Withdrawal of investment earnings chart.

For illustrative purposes only.

Withdrawal “buckets” strategy

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

Here’s the break-down: The first bucket should hold about 20% of your savings, or three to five years of living expenses, in cash, while the second bucket 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.


Although we’ve outlined some of the more common retirement withdrawal strategies for you here, there’s nothing that says you have to stick with a single option. You can mix and match the above approaches to arrive at the optimal income plan for your circumstances. In other words, 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.