Retirement Withdrawal Strategies

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.

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.

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.

A good retirement withdrawal strategy helps your money last for decades. But additional tips can stretch funds even further.