Retirement Withdrawal Strategies: Maximize Portfolio Longevity

Saving for retirement is top of mind for many Americans. Am I putting money away in the right places? Will I have enough saved to live the lifestyle I want in my later years? Will I have money to leave for my family after I am gone?

These are all highly valid and very real concerns. However, many people don’t consider that once they reach retirement, how they withdraw and spend their money can have just as big of an impact on their portfolio as how and where they saved.

A good withdrawal strategy is critical to extending the life of your portfolio. A successful strategy can greatly extend the life of your retirement and expand the assets you wish to leave for your heirs. In this article, we will cover some basic considerations that go into a withdrawal strategy, and address some of the most common mistakes we see when it comes to withdrawing and spending money in retirement.

RMDs and Tax Implications

An important factor in any retirement withdrawal strategy will be RMDs, or Required Minimum Distributions. When you reach age 70.5 and have saved for retirement with an IRA, 401(k), 403(b), or other profit sharing plan, you are required to take an RMD. Depending on the situation, this can bump you into a higher tax bracket than you’d like, so it’s important to ensure that your retirement distribution strategy accounts for these minimum requirements. If you fail to meet the distribution requirements, you are subject to significant penalties of up to 50%.

It’s important to consider the potential implications RMDs might have on your overall income and how that will impact the distribution strategy early in retirement.

Withdrawal Order

The order you withdraw money and from which accounts is a crucial element of a successful retirement distribution strategy. Should you draw from your taxable account before your IRA is depleted? And when should you start tapping into your Roth?

Generally, advisors recommend following this prescriptive order: withdraw from taxable accounts, then tax-deferred, then tax-free. This is generally a good rule, as it allows your tax-deferred and tax-free assets to grow tax sheltered for a longer period of time, but it’s important to caveat that advice with the fact that there is no “one-size-fits-all” solution here. Each person has a unique financial situation that must be looked at holistically when determining a withdrawal order strategy. Consideration must be given to the combination of accounts you own, how much you have saved in each type of account, potential liquidity events, passive investments, social security benefits, and more.

A proper plan for withdrawal order that is tailored to your specific situation can increase your chance of not running out of money in retirement by 8%*.

Working with a Financial Advisor on Withdrawal Strategy

A financial advisor who is a fiduciary for your money can help you come up with a strategy around withdrawal order that works best for you. Personal Capital offers free, no-obligation introductory consultations in which we use information that you provide to show you an overall recap summarizing your goals, time horizon and risk tolerance, balance sheet, and annual cash flow. We’ll also help you better understand your current investment allocation and present our recommended portfolio allocation based on your specific goals and financial situation. This will also include a projected retirement value — our wealth advisors are here to help you chart a course to a successful retirement. We also offer a tool called Smart Withdrawal™ to our wealth management clients to help them map out their income in retirement.