Creating a Sustainable Withdrawal Plan for Your Retirement

Many individuals dedicate a significant portion of their lives to saving for retirement. After years of preparation, however, they often feel uncertain about how to spend their money in retirement while ensuring they have enough to last throughout their lifetime.

It is common for our new clients to struggle with this aspect of retirement planning, often out of fear of depleting their funds. However, if you’ve invested wisely, your money will likely continue growing.

When developing a withdrawal strategy, two key points to consider are:

1. Ensuring you have sufficient funds to support yourself in retirement.
2. Maintaining your lifestyle while also leaving a legacy for your heirs if that is your goal.

Assessing Your Retirement Needs

Before creating a retirement withdrawal plan, assessing your financial needs is important to help ensure you can maintain your lifestyle throughout retirement. Here are three key steps to get started:

1. Estimate Your Expenses: The first step in determining how much money you’ll need in retirement is to estimate your expenses. Be sure to include costs such as housing, healthcare, discretionary spending, and taxes, along with any other foreseeable expenses. This step will help create a clear financial picture and allow you to estimate your monthly needs accurately.
2. Identify Income Sources: Next, identify your sources of income in retirement, such as pensions, Social Security, annuities, and any other consistent income streams. Once you have this total, you can determine how much you’ll need to withdraw from your retirement portfolio. Many people set up automatic monthly transfers from their retirement accounts to their bank accounts to cover these expenses.
3. Estimate Life Expectancy: Estimating your life expectancy is crucial. In our plans, we typically project up to age 95, but this can be adjusted based on your health and family history. It’s wise to be conservative with this estimate to help ensure long-term financial stability.

Retirement Withdrawal Strategy

After determining how much you need from your retirement portfolio, it’s time to create a withdrawal strategy. You may have heard of the “4% rule,” which suggests withdrawing 4% of your retirement savings annually to avoid running out of funds over 30 years. While this is a useful guideline, there are many factors to consider:

• Investment Strategy and Asset Allocation: Your investment strategy and asset allocation play significant roles. Depending on your risk tolerance and market conditions, you may be able to sustain a higher or lower withdrawal rate.
• Inflation Considerations: Although the 4% rule accounts for inflation, inflation rates fluctuate and are difficult to predict.

The best way to determine a successful withdrawal rate and retirement plan is to consult with a trusted financial advisor.

Tax Planning in Retirement

Developing a withdrawal strategy is essential, but it’s equally important to know which accounts or “buckets” of money to pull from. Tax planning in retirement is crucial to minimizing the overall tax burden.

Several strategies to consider include:

• Roth Conversions: Converting traditional IRA funds to Roth IRAs to manage tax liabilities.
• Managing IRMAA Surcharges: Controlling income to avoid higher Medicare premiums.
• Handling Capital Gains: Timing withdrawals to minimize capital gains taxes.
• Charitable Giving: Donating assets for tax benefits and charitable intent.
• Itemized vs. Standard Deductions: Choosing the most beneficial tax filing method.

Understanding when to withdraw from qualified versus non-qualified accounts is key to reducing taxes effectively. While many people reserve their Roth (after-tax) assets for later in life, your strategy may vary based on your situation.

Retirement Portfolio

Diversely investing your retirement funds is also essential to balance risk and return. Regularly reviewing your asset allocation and risk tolerance helps align your investments with your goals. This step is often addressed in annual reviews with your financial advisor. Your portfolio should be adjusted periodically to match your evolving goals and financial plan.

Emergency Fund

Maintaining an emergency fund is vital for handling unexpected expenses without tapping into your investments, which could lead to unplanned capital gains and additional taxes.

Conclusion

By following these strategies, you can work toward a fulfilling and stress-free retirement. Consulting with a trusted financial advisor is an excellent way to make sure your financial plan is up to date and aligns with your goals. Regular updates, typically annually or as needed, will help keep your retirement plan on track and help you create a sustainable retirement withdrawal plan.

The opinion of the author is subject to change without notice and must be considered in conjunction with relevant regulation, as well as subsequent changes in the marketplace. Any information from outside resources has been deemed to be reliable but has not necessarily been verified. Each individual has unique circumstances to which this information may or may not be relevant. Under no circumstances will this information constitute an offer to buy or sell and it does not indicate strategy suitability for any particular investor.