Key Points
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Retirees risk depleting their savings too soon if they don’t have a plan for withdrawals.
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You don’t want to run out of money in your senior years, so you need to limit how much you take from your accounts.
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There are different strategies for determining an appropriate amount of retirement account withdrawals.
You spend your entire career saving for retirement. Unfortunately, once the time for retirement comes, many people who have diligently saved end up making a major mistake with the money they’ve put away.
That mistake: Not having a plan for how to take funds out. Recent research from IRALOGIX found that 49% of retirees do not have a formal withdrawal strategy and instead just take out money as they need it. Only 22% make withdrawals as part of a systematic process, and 17% limit their spending to dividends and interest.
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The problem is, not having a plan could put you at serious risk of going through your money too fast — especially with 44% of retirees saying inflation has no impact on withdrawals and 29% saying they lack a strategy for adjusting spending based on market performance.
Here’s why not having a plan is a huge problem, along with some tips on what you can do to make sure you aren’t on the path to disaster with random withdrawals from your retirement savings.
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Why you need a retirement withdrawal plan
Unfortunately, if you just take money out of your retirement plans without having a strategy, you risk going broke during your retirement.
You need to leave enough money invested in your 401(k), IRA, or other retirement accounts to keep earning returns that help to prevent your balance from declining too much, too fast.
This can be especially important if you sell investments at a bad time, such as during a stock market crash, when your investments are down, as you take a much bigger hit since you are selling before you get the chance for the account to recover.
Sadly, you cannot live comfortably on Social Security alone since your benefits are only intended to replace about 40% of pre-retirement costs. If you have taken too much money out of your 401(k), IRA, or other retirement plan, you may have nothing left but Social Security later in retirement — right at the time when your healthcare costs typically start to ramp up and you need the money the most.
There are also other issues raised by random withdrawals as well, including the possibility of pushing yourself into a higher tax bracket and going above the income threshold where your Social Security benefits become taxable.
How to create a withdrawal plan that’s right for you
If you want to make sure your money lasts, you need a strategic de-accumulation plan. This starts with determining which accounts to withdraw from first and how much money to take out of each one.
Many people find it makes good sense to follow the 4% rule, which means making an initial withdrawal from retirement accounts equal to 4% of the balance and then adjusting up for inflation each year. The downside of this approach is that it is not responsive to market performance.
You could also base your withdrawals on the RMD tables released by the IRS or stick to withdrawing only interest and dividends, which would be your safest bet in terms of protecting the principal but which would leave you with less to spend and cause you to sacrifice more than you need to.
You’ll also need to think about which accounts to withdraw from first. For many, the right sequence is to withdraw from taxable accounts, then traditional IRA and 401(k)s, leaving Roth accounts for last.
Whichever option you choose, the key is to make an informed choice and to have a plan. If you aren’t sure how to create one, you can work with a financial advisor to help you ensure that your nest egg, which you’ve worked so hard to build, provides the support you deserve for the rest of your life.
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