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Key Takeaways
- Nearly half of retirees don't have a formal withdrawal strategy, a recent survey found.
- Financial consequences could be long-term if you don’t have a plan in place for your retirement savings, or if the plan is not adapted to current market and economic conditions.
- According to experts, people should develop a plan for withdrawal that takes into account market performance, taxation, inflation and lifespan.
It’s not enough to save for your retirement. You also need a plan for withdrawing you funds—and lots of Americans don't have one.
Nearly half (49%) of retirees don't have a formal withdrawal strategy, according a recent survey by fintech company IRALOGIX. Many respondents, meanwhile, also said they don't account for inflation for market fluctuations in their preparations. Experts warn that this could cause problems in the future.
"This approach runs counter to a process that emphasizes sustainable withdrawal rates, spreading savings out over the long term to extend them throughout retirement,” said IRALOGIX CEO Peter J. de Silva. "It points to a more instinctive, in-the-moment decision-making style, which could have significant long-term financial consequences."
While there is no one-size fits all approach, experts say, there are many rules of thumb—like the 4% Rule, the bucketing approach and the guardrails strategy—that can be useful starting points to creating a systematic approach for withdrawing money in retirement.
“A formal strategy provides structure, clarity, and peace of mind as clients navigate retirement,” said MaryAnne Gucciardi, a certified financial planner (CFP) at Wealthmind Financial Planning.
Make It Simple: Start With The 4% Rule
Gucciardi points to the popular 4% rule, which suggests that a person can withdraw 4% from their 60/40 portfolio in the first year (while making an annual inflation adjustment thereafter) and not run out of money during a 30-year retirement.
When helping her clients clients create a successful withdrawal strategy, Gucciardi says considering other factors in addition to inflation—including taxes, longevity, and market performance—can make a plan even more effective.
“While a fixed withdrawal rate, such as the 4% rule, offers simplicity, it isn’t suitable for everyone…it doesn’t account for taxes, fees, or market fluctuations, leading many advisors to adapt it to individual needs,” said Gucciardi.
Keep Spending In Check With Guardrails
Nathan Spohn, a CFP and Managing Director at Spohn Partners, works with his clients to create a financial plan a couple of years before retirement and a tax-efficient strategy for tapping their various retirement accounts like 401(k)s and Roth IRAs.
Spohn is a fan of the guardrails approach, which allows retirees to increase their withdrawal rates during bull markets but may require them to reduce withdrawal rates during bear markets.
"Before age 65, we should base our planning on a 3% withdrawal rate,” said Spohn, noting that early retirees could then adjust their withdrawal rate upward (up to 4%) or downward as needed.
Only 28% of the respondents to the IRALOGIX Survey said that they drew less then 3% per year from their portfolio.
Navigate Stock Market Volatility With Bucketing
For those who are wary of market volatility when it comes to their retirement portfolio, experts suggest the bucketing approach.
It is recommended that you keep a cushion of cash equivalent to at least an entire year’s worth of living expenses. This will reduce the chances of needing to liquidate your investments when there are market fluctuations.
“A short-term bucket holds cash or low-risk investments for immediate expenses, a medium-term bucket includes bonds for replenishing the first, and a long-term bucket invests in growth assets like stocks for future needs and inflation protection,” said Gucciardi.
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