Retirement Withdrawal Strategies
Retirement withdrawal strategies aim to preserve your nest egg by using specific rules on when and how to access your money. Some of the most popular methods include the 4 percent rule, the bucket strategy and dynamic withdrawals.
- Written by Rachel Christian
Financial Writer and Certified Educator in Personal Finance
Rachel Christian is a writer and researcher for RetireGuide. She covers annuities, Medicare, life insurance and other important retirement topics. Rachel is a member of the Association for Financial Counseling & Planning Education.Read More
- Edited ByMatt Mauney
Matt Mauney is an award-winning journalist, editor, writer and content strategist with more than 15 years of professional experience working for nationally recognized newspapers and digital brands. He has contributed content for ChicagoTribune.com, LATimes.com, The Hill and the American Cancer Society, and he was part of the Orlando Sentinel digital staff that was named a Pulitzer Prize finalist in 2017.Read More
- Reviewed ByEbony J. Howard, CPA
Ebony J. Howard, CPA
Credentialed Tax Expert at Intuit
Ebony J. Howard is a certified public accountant and freelance consultant with a background in accounting, personal finance, and income tax planning and preparation. She specializes in analyzing financial information in the health care, banking and real estate sectors.Read More
- Published: September 21, 2020
- Updated: July 10, 2023
- 5 min read time
- This page features 8 Cited Research Articles
- Edited By
4 Percent Rule
The 4 percent rule is one of the most established and often-cited retirement withdrawal strategies.
It recommends accessing 4 percent of your total savings and investments during your first year in retirement, then adding 2 percent each following year to adjust for inflation.
For example, assume you retire with $800,000. You would withdrawal 4 percent — or $32,000 — the first year, then $32,640 the second year to adjust for inflation.
The third year, you would withdraw roughly $33,293 — the previous year’s amount, plus 2 percent — and so on.
The 4 percent rule is practical for many retirees because it’s easy to understand and follow. Financial advisor William Bengen created the concept in 1994 and it’s been a standard retirement planning strategy ever since.
- Stocks make up between 40 percent and 50 percent of your retirement portfolio.
- Your portfolio earns a 7 percent annual return on average.
- You withdraw 4 percent of your money during the first year of retirement, then adjust each following year for inflation.
- Your money should last at least 30 years.
But the 4 percent rule has faced criticism. It assumes your spending remains stable throughout retirement, which isn’t always the case.
People who retire early and aren’t collecting Social Security benefits may need to withdraw at a higher rate during the first few years of retirement.
In contrast, the Bureau of Labor Statistics shows annual spending declines with age.
While the 4 percent rule is considered fixed or static, a dynamic withdrawal strategy offers some flexibility on how much money you can take out each year.
Dynamic spending rules allow you to change your annual distributions based on actual market performance. This can be beneficial during significant economic downturns.
In some cases, a dynamic approach also adjusts for inflation.
Dynamic withdrawals may provide “guardrails,” or built-in annual calculations that help you adjust your spending rate up or down.
These guardrails act as mid-course corrections during bad markets, while allocating additional money that can be spent during strong markets.
There are many different types of dynamic withdrawal strategies and each can be tailored to meet your needs.
For example, one approach by investment firm T. Rowe Price suggests taking static inflation-adjusted withdrawals — similar to the 4 percent rule — but dropping the inflation adjustment any year following a substantial market downturn that shrinks your portfolio.
According to this dynamic approach, you can begin retirement with a higher withdrawal rate than people who insist on taking inflation adjustments each year no matter what.
However, dynamic methods are often complex and may require more hands-on management. It’s best to consult a financial advisor or retirement planner to explore your options.
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The Bucket Strategy
A bucket strategy allows you to withdraw retirement assets from three different accounts, or “buckets.”
The first bucket is cash savings. Most financial experts recommend having three to five years of living expenses in liquid cash you can quickly access funds without penalties or fees.
The second bucket holds fixed income securities, such as bonds and certificates of deposits (CDs).
The third bucket holds your remaining investments in equities, including stocks.
The idea is to re-fill your cash bucket with money the other two buckets earn. This approach allows your aggressive investments and savings to continue to grow over time.
A bucket strategy also reduces your exposure to market risk because you won’t be forced to sell stocks in an economic downturn. You maintain enough cash on hand to cover your essential expenses and protect your long-term savings.
While a bucket strategy helps you divvy up your money and investments, it doesn’t actually propose how much you should withdraw each year in retirement.
Retirement Withdrawal Tips
A good retirement withdrawal strategy helps your money last for decades. But additional tips can stretch funds even further.
- Be Mindful of Taxes
- If you withdraw money from a traditional retirement account, such as an IRA or 401(k), you’ll owe income tax on those funds. Make sure to factor these costs into your retirement income budget. You must also make required minimum distributions from these accounts by age 72. If you don’t, the IRS levies a hefty tax penalty.
- Factor in Other Income Sources
- Most retirement withdrawal strategies focus on your savings and investments. But retirees often have other sources of income, too. Social Security, pensions and annuities may also bring in money. Or, you may decide to work part-time in retirement or monetize a hobby in your spare time. Factor these additional revenue streams into your budget and withdrawal strategy.
- Eliminate Debt
- If you enter retirement with debt, interest rates can eat away at your money. Eliminating credit card debt should be a top priority, but paying off other loans — including your mortgage — is also important if you want to stretch your retirement income.
- Revisit Your Plan
- Check on your plan regularly to make sure it still works for you. Life can derail even the best retirement withdrawal strategy. By sitting down once a year, you can run the numbers and see if you’re spending allocation is on track, or if you need to make adjustments.
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8 Cited Research Articles
- Berger, R. (2020, September 1). Secure Your Retirement Income With Dynamic Spending Rules. Retrieved from https://www.forbes.com/advisor/retirement/dynamic-spending-rules/
- Berger, R. (2020, May 20). What Is The 4% Rule For Retirement Withdrawals? Retrieved from https://www.forbes.com/advisor/retirement/four-percent-rule-retirement/
- Light, L. (2020, February 23). Why The Bucket Strategy Is The Best For Retirement Withdrawals. Retrieved from https://www.forbes.com/sites/lawrencelight/2020/02/23/why-the-bucket-strategy-is-the-best-for-retirement-withdrawals/#5ebb7aff6909
- U.S. Bureau of Labor Statistics. (2021, September 9). 2018 Consumer Expenditure Survey. Retrieved from https://www.bls.gov/news.release/pdf/cesan.pdf
- O’Leary, A. (2018, September 22). The 4% rule for retirement savings desperately needs to be modernized. Retrieved from https://www.marketwatch.com/story/the-4-rule-desperately-needs-to-be-modernized-2018-07-20
- Anderson, T. (2017, January 19). Why this works better than the 4 percent rule for retirees. Retrieved from https://www.cnbc.com/2017/01/19/why-this-index-works-better-than-the-4-percent-rule-for-retirees.html
- Laise, E. (2015, February 25). Make Your Retirement Savings Last a Lifetime. Retrieved from https://www.kiplinger.com/article/retirement/t037-c000-s004-make-your-retirement-savings-last-a-lifetime.html
- USA.gov. (n.d.). Retirement. Retrieved from https://www.usa.gov/retirement
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