Money Management

Creating a Retirement Withdrawal Strategy

Is retirement on your horizon? If so, you've probably thought a lot about how much you'll need. But as the big day gets close, many people realize they have new questions—about where to withdraw from, and when.

The 4% rule of thumb
This rule remains a standard starting point: withdraw 4 percent of your total assets in the first year of retirement, and then adjust that amount annually for inflation. Theoretically, your assets should last 30 years under this scenario. But no one suggests following this rule too rigidly—or blindly—because it doesn't take into account market performance or fluctuating income needs. Recently, prominent analysts have questioned whether this rule still works in today's lower-yield environment.1

To determine your withdrawal rate, consider your age, life expectancy, living expenses, and rate of return on investments. Then, plan to monitor results and stay flexible by making adjustments annually.

Rate of return is important, more so the earlier you retire, because it can counteract inflation. It's tempting for people on fixed incomes to move too much money into CDs and bonds, which guarantee modest returns that can be wiped out by taxes and inflation. CDs are NCUA insured and offer a fixed rate of return if held to maturity.

Basic withdrawal rules of thumb

  • Start with the "4% Rule"
  • Plan for 30 years
  • Minimize taxes and capital gains
  • Keep a financial safety net of 1 to 2 years' living expenses
  • Tap taxable accounts first, Roth accounts last
  • Continue investing, and strive for good returns
  • Establish a sustainable strategy, and stick to it – but pay attention to market conditions, especially in early retirement

A typical withdrawal sequence

No matter at what age you retire, the idea behind a withdrawal sequence is to preserve net worth until you're farther down the retirement road. With that thinking in mind, many experts advise accessing funds in the following order2

  1. "Lifetime income" from defined benefit plans, such as pensions, Social Security, and annuities. Use these funds for essential expenses—keeping in mind that your Social Security benefits increase every year the longer you wait to access them, up to age 70.
  2. Taxable accounts that hold stocks, real estate, or investment funds. Taxes are paid annually on interest, dividends, and capital gains from mutual funds. You can also expect to pay capital gains taxes when you take a profit on stocks, mutual funds, or investment property. However, by withdrawing from these taxable accounts first, your tax-advantaged accounts will continue to grow.
  3. Tax-deferred retirement accounts such as IRAs and 401(k)s. You'll pay ordinary income tax on the amount you withdraw, while the remaining assets continue to grow tax-deferred.
  4. Tax-exempt retirement accounts like Roth IRAs. Roth accounts can be useful later in retirement for things like medical expenses, since qualified withdrawals aren't taxed. And, a Roth account can transfer easily to heirs without imposing a tax burden on them.
  5. The goal is to create an "income floor" you won't outlive, comprised of monthly income from Social Security and any pensions, along with part of your nest egg. In addition, experts advise establishing an emergency fund for one or two years' expenses, to ride out market fluctuations and other hiccups without worry.

The allure of annuities
Sometimes, the thought of maintaining and possibly running out of assets over time makes the guaranteed payouts of annuities very attractive. There are many ways to structure annuities to provide insurance against outliving your assets. Please keep in mind, guarantees are based on the claim's paying ability of the issuing company.

An annuity can begin now or at some point in the future, providing payments in whatever amount you determine is needed to bridge any coverage gaps in annual income. Separate annuities can be purchased over time, allowing you to leave investments untouched in early retirement.

Some annuities can provide guaranteed income for you and/or your spouse, with an option to pass any remaining money to your beneficiaries. Options like this essentially transfer risk from you to the insurance company, but they come at a cost.

Because of all these considerations, it's best to work with a financial consultant to determine if an annuity is right for you, and if so, which type.

Your best strategy: confidence
A good withdrawal strategy will minimize the impact of taxes and keep your investments diversified. But most importantly, it will allow you to live the rest of your life with confidence.

You worked hard for your nest egg. Now, it's time to make the most of it—so you can savor the next chapter with total confidence. If retirement is on your horizon, it may be time to book an appointment with your financial consultant to discuss your withdrawal strategy.

Orange County's Retirement and Investment Services offers a team of experienced, savvy financial consultants who can help you develop a withdrawal strategy that makes the most of your retirement assets. Even if you already have an advisor, it never hurts to get a second opinion. To learn more, contact us at (888) 354-6228 ext.7599.


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Securities and Advisory Services offered through LPL Financial, member FINRA/SIPC and a registered investment advisor. Insurance products offered through LPL Financial or its licensed affiliates.
Orange County’s Credit Union and Orange County’s Retirement and Investment Services are not registered broker/dealers nor are they affiliated with LPL Financial.
2National Endowment for Financial Education: