How to Develop a Retirement Withdrawal Strategy

The answer to the question “Do I have enough money to retire?” isn’t just about how much you’ve saved. The way you withdraw money in retirement can determine how long your savings last. That’s why having a retirement withdrawal strategy that turns your savings into income is critical. 

What a Retirement Withdrawal Strategy Does 

A retirement income strategy outlines how and when to take money from savings. You could have a variety of different ways to fund your retirement that can impact your taxes and future net worth differently. 

Having a withdrawal strategy balances spending needs, taxes and long-term sustainability so you can feel confident that you have a steady income that will fund your lifestyle without depleting assets too quickly.

Understanding the 4% Rule and Safe Withdrawal Rules 

The 4% rule is an old rule of thumb that suggests withdrawing 4% of your savings each year to balance living in retirement, protecting your savings over time and planning for inflation. The 4% does not account for any income you have outside of savings, such as Social Security benefits or a pension. This rule was created in the 1990’s using data from 1926 to 1976 and was built to weather economic storms. Because of this, 4% is a fairly conservative withdrawal rate; the creator of the rule, William P. Bengen, recently came out with an updated suggestion. He says many people can withdraw at a higher rate (more like 5%-5.5%), enabling wealth preservation while also providing funds for people to enjoy retirement. 

Of course, it’s not just about how much you withdraw, but also from where you withdraw (and when) that impacts your nest egg.  

How Taxes and 401(k) Withdrawal Rules Affect Your Plan 

Each type of retirement savings account has different rules and different tax implications. It’s important to understand the details of each type of account, because the withdrawal order can impact your long-term savings.

People who are self-employed or business owners may have other retirement savings options available, but the most common forms of retirement savings accounts – 401(k)s and IRAs – can be traditional or Roth accounts. 

Traditional Accounts 

Traditional accounts are funded with pre-tax dollars, meaning you do not pay current income tax on the amount contributed and, if you’re putting away a set percentage for retirement, more of your money goes into the account – hopefully to grow. When you make withdrawals in retirement, that money is taxed as income. 

The age at which you can begin drawing money from a traditional account is 59½. Unless there is a reason for an exception, early withdrawals result in a 10% penalty.  

Traditional accounts are subject to Required Minimum Distributions (RMDs). That means every year after you turn 73, you must withdraw a set amount (calculated by the IRS based on life expectancy).

Roth Accounts

Roth accounts (IRAs or 401(k)s) are funded with after-tax income. That means there is no tax benefit on the front end. This is an attractive option for people who believe their taxes will be higher in retirement; perhaps they are in a low tax bracket now or believe that income tax rates will increase in the future. 

Because the money has already been taxed, withdrawals are tax-free as long as you have had the account open for at least five years and are 59 ½ (or experiencing an IRS-defined hardship). Withdrawing early without a hardship will result in a 10% penalty.

Managing Market Risk and Changing Needs

It’s almost impossible to take into account the changes that can occur during your retirement, such as inflation, so it’s important to keep in mind that your strategy should be adjusted throughout your retirement journey. 

Your needs may change, causing you to adjust when and from where you withdraw money. For example, you may find yourself traveling less than you planned or may experience a situation that requires you to spend more on healthcare than you anticipated. Outside factors, such as market downturns, can also affect how long your savings will last. With a flexible withdrawal strategy, you have the information you need to make adjustments during volatile periods. 

Turn Savings Into Sustainable Retirement Income 

A well-planned retirement income strategy can help you feel more confident about the future. A Farm Bureau agent or financial advisor can help you build a withdrawal strategy that fits your goals.