Retirement is a whole new ball game when it comes to your money. 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. These can include outliving your savings, inflation outpacing your investments and the volatility of the market. How you take money from your retirement accounts is therefore an important decision that should be made carefully to help you manage these risks.
There are many ways to start drawing down your retirement assets. Sticking to steady, fixed withdrawals throughout retirement is one approach. Yet there are other strategies that may work depending on your immediate income needs, your tolerance for risk and your age. Before settling on a withdrawal strategy, be sure to understand all your options.
Start with your investment mix
Prior to withdrawing anything, evaluate your investments to make sure they are still in line with your long-term goals, income needs and risk tolerance. Your investment mix, or asset allocation, is a crucial part of your withdrawal plan. Having a diversified mix of investments can help you manage risk. Even as you withdraw from an account in retirement, consider balancing your investments among those with growth potential and ones with less risk.
Yes, you read correctly: growth. One common misconception among investors nearing retirement is that they should have fewer equity and growth investments (stocks) in favor of bonds and cash-like investments. While reducing equities may reduce market risk, moving too far into bonds and cash may increase the risk of not keeping up with inflation, undermining the long-term value of your account.
Remember, retirement can last for 20 to 30 years or more. Even if inflation stays low (around 3%), the value of your money could be reduced to half in about 24 years. Very conservative investments may have a hard time keeping up. Keeping some potential growth investments like equities or real estate may help your portfolio keep pace.1
Consider these common withdrawal strategies
Once you’ve determined the asset allocation that’s right for you, it’s time to turn your attention to how you’ll withdraw your money. You might choose one of the strategies listed below, or consider a strategy that combines elements from more than one of these approaches.
Strategy 1. Fixed percentage or 4% rule
One common rule of thumb is to withdraw a fixed amount such as 4% each year over a 30-year period to 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.
Regular withdrawals can 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’re waiting to make a decision about a lifetime income investment. You can generally set up the withdrawals in the amount and frequency you prefer. They can then be adjusted or stopped if your needs or goals change. Just remember to monitor your asset allocation and rebalance as needed.2
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 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
Strategy 3. Interest-only income (applies to fixed-income annuitants only)
If you hold fixed annuities in your retirement accounts and want to take withdrawals between the ages of 55 and 69½, it’s possible to receive only the interest from the account as income without drawing from the principal. Starting at age 70½, required minimum distributions (RMDs) on the principal must be taken.3
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 something to consider as you transition from your job or are waiting on other sources of income such as Social Security to begin.4
Another way to mitigate investment risks in retirement is by building certainty into your plan through lifetime income options. For example, converting a portion of savings into regular, reliable income from an annuity to pay for everyday expenses may offer flexibility to withdraw your remaining savings how you like.5 Learn more about using annuities and other guaranteed sources of income.
Pay attention to required minimum distributions (RMDs)
According to federal tax laws, 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 the year after you reach age 70½. Failure to do so will result in a 50% penalty on the amounts required but not taken. 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 the prior year’s ending account balance. You may take out more than the minimum.
- If you have multiple retirement accounts, you must calculate RMDs separately. Depending on the type of account, you may be able to withdraw the total amount from one or more accounts as you choose.
- Roth IRAs and most nonqualified employee-sponsored plans do not require RMDs.
- You can’t roll over RMDs into another type of tax-advantaged account.
- If you’re still working at 70½, you can continue contributing to your traditional 401(k) or 403(b) or Roth 401(k) or 403(b). You don’t need to take an RMD from your current employer’s retirement account until you retire. However, you’ll be required to take RMDs from any other tax-deferred retirement account you may own even if you’re still working at 70½.
While you’re responsible for taking RMDs from your account, you may be able to set up recurring withdrawals—when RMDs are calculated and paid automatically—so you won’t miss the deadline each year. TIAA accounts offer this option.
Some next steps to think about
- 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.
- Think about how long retirement might last.
No one knows what the future holds, but many people are living longer than ever before. Whether it’s 20 years, 30 years or more, this will be an important factor in your overall withdrawal strategy.
- Consider covering essential living expenses with guaranteed income.
As part of your retirement income plan, you may want to cover your essential expenses with guaranteed lifetime income that doesn’t 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 withdrawals will play in providing regular income.
For help with a retirement income plan and withdrawal strategy built around your needs and goals, talk to a TIAA financial consultant by calling 888-583-2535, weekdays 8 a.m. to 7 p.m. (ET).