If you want financial security in retirement, it’s important to have a well-planned withdrawal strategy, also known as a decumulation strategy. That’s because choosing the best way to access and spend your retirement savings will help you get the most out of it. By thinking ahead, you may avoid paying unnecessary taxes and running out of money.
There are many methods for withdrawing retirement savings, and there isn’t a single approach that’s right for everyone. In fact, most financial professionals agree it’s a good idea to use a combination of them.
6. Tap your savings by bucket
With this strategy, you divide your retirement investments into three buckets:
- Immediate (short-term)
The idea is to withdraw your income from the first bucket, which is continually replenished with earnings from the others.
Withdrawing your funds this way can provide peace of mind since it reduces the chance that you’ll run out of money. It can also prevent you from needing to sell investments during a market downturn for cash. Over- or underestimating how much to put in each bucket, though, can make this strategy less effective.
7. Effective use of required minimum distributions
Many retirees rely on required minimum distributions (RMDs) to signal when they should withdraw money from their retirement accounts. RMDs are minimum amounts that an individual must take out of their tax-deferred retirement accounts annually once they reach age 73 if they turn 72 after 2022. That age bumps up to 75 for those who turn 74 after 2032.
To calculate your RMDs, divide the amount of money you had in an account at the end of the past year by the IRS’s "life expectancy factor" that corresponds to your age. To find your factor, consult the life expectancy tables in IRS Publication 590-B. Repeat the process for all your retirement accounts, because you’ll need the RMD for each one.