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Key Takeaways
- Nearly half of retirees don’t have a formal withdrawal strategy, a recent survey found.
- Not having a plan for withdrawing retirement savings or adapting the plan to economic and market conditions could have long-term financial consequences.
- Experts say that people should create a withdrawal plan that factors in market performance, taxes, inflation, and longevity.
Saving for retirement is only half the job. You also need a plan for withdrawing you funds—and lots of Americans don’t have one.
Nearly half (49%) of retirees don’t have a formal withdrawal strategy, according a recent survey by fintech company IRALOGIX. Many respondents, meanwhile, also said they don’t account for inflation for market fluctuations in their preparations. That could lead to trouble down the road, experts say.
“This approach runs counter to a process that emphasizes sustainable withdrawal rates, spreading savings out over the long term to extend them throughout retirement,” said IRALOGIX CEO Peter J. de Silva. “It points to a more instinctive, in-the-moment decision-making style, which could have significant long-term financial consequences.”
While there is no one-size fits all approach, experts say, there are many rules of thumb—like the 4% Rule, the bucketing approach and the guardrails strategy—that can be useful starting points to creating a systematic approach for withdrawing money in retirement.
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“A formal strategy provides structure, clarity, and peace of mind as clients navigate retirement,” said MaryAnne Gucciardi, a certified financial planner (CFP) at Wealthmind Financial Planning.
Make It Simple: Start With The 4% Rule
Gucciardi points to the popular 4% rule, which suggests that a person can withdraw 4% from their 60/40 portfolio in the first year (while making an annual inflation adjustment thereafter) and not run out of money during a 30-year retirement.
When helping her clients clients create a successful withdrawal strategy, Gucciardi says considering other factors in addition to inflation—including taxes, longevity, and market performance—can make a plan even more effective.
“While a fixed withdrawal rate, such as the 4% rule, offers simplicity, it isn’t suitable for everyone…it doesn’t account for taxes, fees, or market fluctuations, leading many advisors to adapt it to individual needs,” said Gucciardi.
Keep Spending In Check With Guardrails
Nathan Spohn, a CFP and Managing Director at Spohn Partners, works with his clients to create a financial plan a couple of years before retirement and a tax-efficient strategy for tapping their various retirement accounts like 401(k)s and Roth IRAs.
Spohn is a fan of the guardrails approach, which allows retirees to increase their withdrawal rates during bull markets but may require them to reduce withdrawal rates during bear markets.
“Before age 65, we should base our planning on a 3% withdrawal rate,” said Spohn, noting that early retirees could then adjust their withdrawal rate upward (up to 4%) or downward as needed.
In the IRALOGIX Survey, only 28% of respondents said they withdrew less than 3% annually from their portfolio.
Navigate Stock Market Volatility With Bucketing
For those who are wary of market volatility when it comes to their retirement portfolio, experts suggest the bucketing approach.
This approach suggests keeping a cash cushion with at least a year of expenses and is meant to minimize the likelihood of having to liquidate investments during a down market.
“A short-term bucket holds cash or low-risk investments for immediate expenses, a medium-term bucket includes bonds for replenishing the first, and a long-term bucket invests in growth assets like stocks for future needs and inflation protection,” said Gucciardi.
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