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Most people work for 30 or 40 years; you might be surprised to know that your retirement savings may also need to last that long. While you may want to travel and do things you couldn’t when you worked full-time, spending too much too early may drain your savings faster than expected. That’s why a withdrawal strategy matters. If you think carefully about how to pull your money, it can help turn your retirement assets into long-lasting income.

Withdrawal strategy explained

A withdrawal strategy (also called a decumulation strategy) guides how you take funds from your retirement accounts to create your retirement income. This can help keep you from outliving your savings by establishing an amount that you can safely withdraw each year. It may also prevent you from paying unnecessary taxes.

Various strategies address different financial concerns and situations. You may use one or a combination to fit your circumstances and goals. You'll need to consider factors such as:
  • Your marital status
  • All potential sources of retirement income
  • Your life expectancy
  • How long you want your savings to last
  • How withdrawals may affect your taxes
  • How comfortable you are with investment risk

No matter which strategies you choose, you'll want to maximize additional retirement benefits you may have. By making the most of resources like pensions, Social Security and Medicare, you could avoid spending more of your retirement assets than you need to.

Examples of withdrawal strategy options

While there are many withdrawal strategies, here are a few options you may consider:

The 4% rule
Let’s say you want your money to last 30 years. You might think about using a strategy such as the 4% rule. With this approach, you’d plan to take 4% from your accounts in your first year of retirement, then adjust the amount for inflation each of the following years. Or you could use a different withdrawal percentage to suit your situation.
Account sequencing
To minimize taxes, you may apply account sequencing. This method focuses on the best order in which to draw from accounts. You might pull from taxable accounts first, then tax-deferred, and lastly tax-free, as is often suggested. Depending on variables such as your tax bracket, though, a different order may provide more advantage.
Bucket method
You will probably need your retirement assets to continue growing after you retire. A strategy such as the bucket method may help you decide how much to invest in lower-risk and higher-risk assets. The idea is to protect money you need in the short-term while allowing some investments time to grow.

When should you start planning?

Ideally, you should begin thinking about a withdrawal strategy as early in your work life as possible, since it can impact how you save for retirement. However, it’s not too late to create a strategy even if you’re closer to retiring or have already retired.

That’s because toward the end of your career, you can better estimate how much retirement savings you expect to have for retirement. You’ll also be able to calculate possible expenses more realistically. Ballparking your income and costs will give you a clearer picture of your retirement budget.

To calculate a retirement budget, add up all your income sources such as:
  • Retirement accounts
  • Social Security retirement benefit
  • Pensions
Remember to factor in taxes, which can reduce your total. To estimate expenses, think about your desired lifestyle. Include items like:
  • Housing
  • Food
  • Transportation
  • Travel
  • Entertainment
  • Insurance
  • Out-of-pocket health care
  • Long-term care
Once you have a sense of your budget, you may decide you want to save more now so you can afford more later. Or you may consider postponing retirement. If you’re currently retired, you may decide to supplement your income by working part time as a retiree. Paying off debt can make additional room in your budget, too.

Creating a withdrawal strategy takes careful consideration. By planning, you can enjoy your savings — and your life in retirement — to the fullest.

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