Making a plan for withdrawing money from retirement accounts is the piece of the saving-for-retirement puzzle that is often overlooked or treated as an afterthought. This is a mistake. Smart distribution strategies, which can be combined and modified over time, will allow for financial longevity in retirement. Below are some methods for withdrawal strategies that work together to help stretch your funds further into retirement.

Consider the 4% Rule

The 4% rule established the idea that withdrawing 4% from a retirement fund in the first year, followed by inflation-adjusted withdrawals in succeeding years, should secure enough money to sustain a 30-year retirement. This rule was established more than 25 years ago as a way to guide people through retirement withdrawals, and it’s been widely used. However, more modern approaches allow for customization. When you take into account a retiree’s age and life expectancy, the percentage can vary from a higher, more aggressive percentage to a lower, more conservative percentage. A financial advisor can help you determine the best approach for your circumstances.

Consider Fixed Dollar Withdrawals

A smart withdrawal strategy is to make systematic withdrawals of the same amount each month, rather than just withdrawing on an as-needed basis. However, it’s important to keep an eye on the fund’s performance and adjust your withdrawal amount accordingly. You don’t want your fixed dollar amount to nick away at your account’s principal.

Consider Restricting Withdrawals to Investment Income

An additional strategy is to restrict withdrawals to income produced by investments. This means keeping the account’s principal stable by taking out only dividends and interest. However, there are two downsides to this method to keep in mind:

• Annual income from investments can fluctuate.
• Unless the principal amount is considerable, dividends and interest alone may prove to be inadequate amounts to live on.

Consider a Total Return Strategy

A total return strategy analyzes dividends, interest, growth, and principal in order to create predictable and systematic withdrawals. Many times these withdrawals are based on a percentage of the total fund, sometimes using the 4% rule or an alternative fitting percentage.

While the distributions may remain the same each month, the source of the money can alter. This is a method where a financial advisor can be valuable. They can analyze fund performance to verify which funds to withdraw from, and then readjust the portfolio as necessary.

Consider the Bucket Strategy

A typical bucket strategy divides your retirement assets into three categories based on a timeline of when you anticipate drawing on them.

• The first bucket is for money that you intend to spend within three years. This money should be kept in cash or bond funds as these are the most stable.
• The second bucket is for the portion of your portfolio that you expect to use in three to 10 years. This money should be invested in assets that are expected to see moderate growth, like a mix of stocks and bonds.
• The third bucket is for growth. Money that you don’t expect to use for at least 10 years can be invested more aggressively (i.e., stocks that will provide you with higher long-term rates of return).

This strategy helps to avoid pulling money from stocks in a down market. As bucket one runs low, you’ll refill it from bucket two, which in turn should be replenished by shifting money from bucket three.

Consider Minimizing RMDs

Traditional 401(k)s and IRAs have required minimum distributions (RMDs). This is the amount of money that must be withdrawn from these accounts starting at a certain age. Previously, this age was 70 ½, but the SECURE Act pushed the age back to 72. It is possible to decrease or wipe out RMDS by shifting money from traditional retirement funds to Roth accounts. Though tax will be due on any amount converted from a traditional fund to a Roth account, once the funds are in a Roth account, it will grow tax-free and can be withdrawn tax-free. This approach might be useful for new retirees who delay the start of Social Security.

Consider Account Sequencing

Your tax bracket plays an important role in when to withdraw money from tax-advantaged funds. When thinking about the order in which to withdraw funds, the most advantageous approach will minimize taxes and allow money in long-term accounts to continue to grow. This is called sequencing. Therefore, it’s common advice to save traditional accounts until later in life when they’ll be in a lower tax bracket. The best approach could be to withdraw from a combination of savings and investment accounts, but a financial advisor can help identify the best plan.