Withdrawal strategies: How to withdraw retirement funds

Creating a retirement income plan can help you define your withdrawal strategy — or when and how often you will pull money from your retirement investment accounts. There are many ways in which to start drawing down your retirement savings, but each should be managed carefully to make sure you don't outlive your money.

Knowing how to withdraw money from retirement accounts doesn't necessarily entail sticking to a steady, fixed distribution throughout retirement. There are different strategies that may work depending on your immediate income needs, your tolerance for risk, and your age. If you use a portion of savings to purchase a fixed annuity that creates regular, reliable income to pay for everyday expenses, you can have a more flexible approach to how your remaining savings are withdrawn. Please note that guarantees are based on the claims-paying ability of the issuer.

How to withdraw money from retirement: determine your investment mix

Before settling on a withdrawal strategy, evaluate your investment portfolio to make sure the investments are still in line with your long-term goals. Your investment mix, or asset allocation, is a crucial part of your withdrawal plan. Even as you draw from a portfolio in retirement, consider balancing your investments among those with growth potential and ones with less risk.

Yes, you read correctly. Growth. One of the common misconceptions that investors make as they near retirement is the idea that their portfolio allocation should include fewer equity and growth investments in favor of more bonds and cash-like investments. While decreasing some equity exposure can reduce market risk, moving too far into bonds and cash might open a portfolio to inflation risk that can be damaging to your long-term withdrawal strategy.

Keep in mind that retirement could last for more than 30 years. Remember how much cheaper everything was 30 years ago?  If inflation stays high at around 7%, the value of your money could be reduced to half in about 10 years. Over that same period, very conservative investments may have a hard time keeping up. Some exposure to potential growth investments, like equities or real estate, may help your portfolio keep pace.  However, it is important to keep in mind that there are risks in investing, including the loss of some or all of your investment.

Please note also that there is no guarantee that asset allocation reduces risk or increases returns.

With inflation over 7%, the purchasing power of your money could be reduced to half in about 10 years.

And while it's difficult to eliminate investment risk, you may be able to manage it by having a diversified investment portfolio. Your asset allocation strategy should take into account your long-term goals, income needs and risk tolerance. Since different types of investments tend to perform differently over time, a diversified mix could help mitigate some of the risk. Diversification is a technique to help reduce risk. However, there is no guarantee that diversification will protect against a loss of income.

Consider these common types of withdrawal strategies

Once you've determined the lifetime income stream that is right for you, it's time to turn your attention to withdrawing income for your other needs. An adaptive withdrawal strategy may include elements of the most common strategies for drawing down a portfolio.

Strategy 1. Fixed percentage or 4% rule.

Systematic withdrawals offer the flexibility to control and change the amount and frequency of your income. However, that flexibility should come with caution in managing the amount you withdraw so as not to risk outliving your assets.

One common rule of thumb is that a retiree with a 30-year time horizon can plan to withdraw a fixed amount somewhere around 4% from a portfolio each year and minimize the chances of running out of money. That means if you have $1 million in savings, you could withdraw $40,000 to live on each year after adjusting for inflation. However, there are a number of weaknesses to this strategy:

  • A period of historically low interest rates make traditional income-producing investments like bonds less likely to generate the income that many retirees expected.
  • If inflation erodes the purchasing power of your money over time, it may require you to withdraw larger amounts of money.
  • If you are invested in stocks and the principal value of the assets decline, you may have less of a portfolio to withdraw from.
  • Your income needs are not likely to be as consistent as your withdrawal plan, and you may need more income in some years and less than others.

Systematic withdrawals can certainly make sense if you need income for a limited period, say while you are working part-time or waiting to receive other income such as Social Security. Or perhaps, you were waiting to make a decision about a lifetime income investment.

Your workplace plan may allow you to set up systematic cash withdrawals and receive payments monthly or annually, according to the frequency you prefer. These systematic withdrawals can be changed or stopped if that’s what you decide. Just remember to monitor your asset allocation, as rebalancing may be needed as these withdrawals are being made. Note that rebalancing does not protect against losses or guarantee that an investor’s goal will be met.

Strategy 2. Investment Buckets.

You could also divide your assets into different buckets. One bucket may hold cash or fixed-income investments to produce income and preserve principal in the near term, while another may hold more aggressive growth investments to pursue growth over a longer period of time.

A bucket strategy can help to reduce market risk. If you prefer to use this strategy, you may need to work with an investment advisor to determine the asset allocation that reflects your needs.1 However, neither rebalancing nor asset allocation can eliminate the risk of investment losses or guarantee that an investor's goal will be met.

Strategy 3. Interest-only income.

For investors who hold fixed annuities in their retirement accounts and want to take withdrawals between the ages of 55 and 72, it’s possible to receive only the interest from the account as income without drawing from the principal balance until minimum distributions are required at age 73.  Please note that for the TIAA Traditional Annuity Interest-Only (IO) option, a 10% IRS early withdrawal penalty may apply to interest-only payments made before age 59½.

This strategy provides a degree of flexibility, allowing you to switch to another income option after the first year. This can make the interest-only withdrawal strategy an option as you transition from your job or are waiting on other sources of income, such as Social Security, to begin.

Annuities are designed for retirement and other long-term goals.  If you choose to invest in the variable investment products, your money will be subject to the risks associated with investing in securities, including loss of principal.  Withdrawals of earnings from a retirement account or an annuity are subject to ordinary income tax, plus a possible federal 10% penalty if you make a withdrawal before age 59½.

Pay attention to Required Minimum Distributions (RMDs)

According to federal tax rules, you must start taking minimum distributions from tax-deferred retirement savings accounts including 401(k)s, 403(b)s, 457(b)s, traditional IRAs and SEP IRAs by April 1 after the year you reach the required beginning date. For IRAs (other than Roth IRAs), your required beginning date is April 1 of the year following the calendar year in which you reach your Stated Age. For employer sponsored retirement plans, your required beginning date is April 1 of year following the calendar year of the later of (1) your retirement from the plan sponsor or (2) the calendar year in which you reach your Stated Age. Your Stated Age is age 72 if you were born in 1950 or earlier; 73 if born between 1951 and 1958; 75 if born in 1960 or later. If you were born in 1959, federal guidance is needed to determine if your Required Beginning Date is age 73 or 75.  Failure to do so will result in a penalty charge that can be as high as 25% of the distribution amount. Here are some of the key things to remember about RMDs:

  • The amount that you must take out each year depends on your age, life expectancy and year-end account balance. You may take out more than the minimum.
  • If you have multiple retirement accounts, you must calculate RMDs separately, but you can withdraw the total amount from one or many accounts.
  • Roth IRAs and most non-qualified employee-sponsored plans do not require RMDs.
  • You can’t rollover RMDs into another type of tax-advantaged account.
  • If you are still working at 73, you can continue contributing to your employer's 401(k) or 403(b) or Roth 401(k) or 403(b). You don't need to take an RMD until you separate from service. However, you will be required to take RMDs from any IRA you may own even if you are still working at 73.

While you are responsible for taking distributions from your account, your retirement plan administrator may be able to help by making RMDs automatic. At TIAA, we offer the Minimum Distribution Option, which calculates and pays out RMDs automatically, helping you satisfy federal requirements while preserving your account balance.

Risks and withdrawal strategies

As you approach retirement, you’ll likely need to shift your focus. Where once the primary goal was saving and investing for retirement, it now becomes turning those savings and investments into income. It also means paying special attention to the unique risks you’ll face as a retiree. This can include outliving your savings, inflation outpacing your investments, and the volatility of the market.

There are ways to mitigate these risks by building certainty into your plan. Learn more about using annuities and other guaranteed sources of income. Read more about retirement risks.

Some next steps to think about before cashing out retirement

  • Create a realistic retirement budget to estimate essential living expenses and discretionary spending
    Knowing what your retirement lifestyle will cost can help you better prepare to pay for it.
  • Decide on a retirement date
    When you retire will be an important factor in your overall withdrawal strategy.
  • Consider covering essential living expenses with guaranteed income2
    As part of your retirement income plan, you may want to cover your essential expenses with guaranteed lifetime income that does not have to come from regular portfolio withdrawals.
  • Calculate how much you can safely withdraw from your portfolio
    Once you have a retirement income plan, you should have a better sense of the role that portfolio withdrawals will play in generating regular income.

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1 J. Kuepper. A Comparison: The Bucket Strategy vs. Systematic Withdrawals. (9/14/2015) Investopedia -

2 Any guarantees under fixed annuities issued by TIAA are subject to TIAA's claims-paying ability.

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This material is for informational or educational purposes only and does not constitute investment advice under ERISA. This material does not take into account any specific objectives or circumstances of any particular investor, or suggest any specific course of action. Investment decisions should be made  based on the investor’s own objectives and circumstances.