1. Use the 4% rule
This was created by a financial professional in the 1990s, the goal of this strategy is make sure your money will last for 30 years. It calls for withdrawing an amount that equals 4% of your entire retirement portfolio during the first year of retirement and then adjusting that withdrawal amount for inflation each year thereafter.
However, the 4% rule doesn’t work for everyone or through all market conditions. In fact, some of us professionals consider it outdated. So, if you decide to use it, think of it as a guideline rather than a rule. You may want to adjust the percentage based on your circumstances and goals which we can help you figure out.
2. Make tax-conscious withdrawals
When you make withdrawals from your accounts in a certain order, you can minimize taxes on what you take out and leave the remaining funds invested so they have time to grow. Often, we suggest that you pull from taxable accounts first, tax-deferred accounts second and tax-free accounts last.
However, you’ll need to consider your income and tax situation to decide which order will work best for you. As your finances change year to year, you may also decide to adjust the order. For example, if you land in a higher-than-usual tax bracket one year, withdrawing from a tax-exempt account, such as a Roth IRA, may help you avoid higher taxes. We suggest you consult with a tax advisor that can help you sort through your options and determine the best approach.
3. Make fixed-amount withdrawals
If having steady cash flow sounds appealing, consider taking systematic withdrawals from your retirement savings. That means you’d choose a set payment amount to withdraw periodically, such as every month, quarter, or year.
While this might be a good strategy to generate your retirement lifestyle income, it doesn’t account for investment performance. If your investments don’t grow as expected, your overall account value might not be enough for you to make regular withdrawals at the same level throughout retirement.
4. Withdraw earnings, not principal
To avoid spending down their principal, some retirees choose to withdraw only the earnings from their investments each year and leave the principal untouched. This strategy can be useful if your principal is large enough to create a livable, lifestyle income from interest and dividends. However, it could result in an unpredictable income, as your investment performance and dividends fluctuate. That could especially affect your income during volatile markets.