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Dispatches

Five Strategies for Withdrawing From Retirement Savings

The 4% rule isn't the only approach to withdrawing retirement income. Mixing and matching different approaches may help to match the withdrawal strategy with each income need.

The 4% rule has long been the standard model for drawing down savings in retirement. It is not the only approach to retirement income, however. BlackRock recently listed five ways for making withdrawals. In doing so, the firm noted the ability to mix and match. A blended approach may help to match the withdrawal strategy with each income need.

These five retirement withdrawal strategies are:

Fixed-Dollar Withdrawals: A fixed-dollar amount is withdrawn for a period of time. This is the simplest and most easy-to-implement strategy. It does not adjust for inflation, which may lead to withdrawals not being large enough to fund future expenses. It can also erode a retiree’s principal if the withdrawal amount is too large.

Fixed-Percentage Withdrawals: A fixed-percentage amount of retirement savings is withdrawn annually. While the percentage does not change, the actual dollar amount of the withdrawal will change depending on whether the portfolio has increased or decreased in size. Over time, this strategy has the potential to allow the portfolio to grow if the percentage amount withdrawn is lower than the rate of return. It may erode the portfolio, however, if the portfolio’s rate of return is lower than the percentage withdrawal rate.

Inflation-Adjusted Withdrawals: A specified amount is withdrawn during the first year of retirement and is then increased during each subsequent year of retirement. This follows the same methodology as the 4% rule, but can be applied to higher or lower percentage withdrawal amounts. The upside is that retirement income will increase over time, but the strategy requires annual calculations. It can also erode principal and, if too high of a withdrawal rate is chosen, deplete the account.

Withdrawal of Investment Earnings: Commonly referred to as an approach that never touches principal; only the income provided by dividends, interest payments and fund distributions are withdrawn. This preserves the underlying value of the portfolio, but may not provide enough retirement income to keep up with inflation. It can also lead to variable amounts of retirement income.

Buckets: Assets are separated into three “buckets,” one holding cash, the next holding bonds and the third holding stocks. Cash spent from the first bucket is replenished with earnings from the second and third buckets. It controls risk and gives the portfolio more time to grow.

Source: “5 Retirement Income Strategies,” BlackRock.

Discussion

Tom Jarosz from AZ posted over 8 years ago:

No articles that I have read address how Mandatory Distributions from traditional IRAs play into any withdrawal plan that is discussed above. You have to take whatever IRS mandates.


James from AE posted over 8 years ago:

If you're 70 1/2, why not just apply the mandatory percentage of the IRA withdrawals to taxable accounts? The MRDs factor in life expectancy. Just divide the MRD by IRA balance and multiply the result times taxable accounts. Even if you don't have an IRA you can derive the percentage from the IRS info on-line. Fidelity has a nice MRD calculator too, as I'm sure do others. Like the Boy Scouts used to say: "Keep it simple; make it fun..."


Rich R from MA posted over 8 years ago:

Just because you must withdraw an MRD from an traditional IRA doesn't mean you have to spend it (aside from paying any taxes on the withdrawal). So it is not necessarily a 'withdrawal' in the sense of the article. To simplify withdrawal calculations, I find it useful to use the estimated _after tax_ value of my tax-deferred accounts in calculating the total value of my portfolio.


john from California posted over 8 years ago:

to Tom Jarosz - Re:RMD Yes, you have to take what the IRS says from your tax deferred accounts during the year in which you reach 70.5 years old. But the RMinimumD is just that: a minimum. You can always take more. After doing all the calculations this year for the first time, I found out later in January that I wasted my time. Vanguard, Schwab, and Scottrade all sent me a paper with the specific amounts that the IRS required me to withdraw. The totals were within a few cents of what I'd calculated. The five strategies above refer to all of one's retirement liquid assets ....not just tax deferred.


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