It’s time to kick up your heels and relax. Go fishing, out to dinner, travel, or just spend the day basking in the sunshine. Happy retirement! But before the celebrations get out of hand, let’s talk about retirement withdrawal strategies.
If you never plan to work again, your current savings become an essential asset. Before you retire, you need to make an honest review of your savings and investments. Once you make the decision to retire, you are relying on those assets to hold you together for the remainder of your life (unless you plan to start working again or have a wealthy family member willing to pick up the slack).
It’s helpful to understand retirement withdrawal strategies. No matter the case, planning for retirement will be different for each individual. This is why working with a financial advisor can be so valuable. With their expert knowledge of how financial vehicles work, they can help you understand which investments will put you in a position to retire comfortably.
Unfortunately, you need to be careful when you choose an advisor. Most financial advisors get paid for assets under management, so that means the only way they are getting paid more is by working with a larger number of people. This environment can mean that they wind up putting their clients in generic categories to move on to the next person. A generic category is not personalized to you and will not be in your best interest.
Of course, if you can find a fiduciary who truly spends the time to get to know you well, you can rely on that planning better. Still, it will be vital for you to understand what’s happening with your finances so you can plan how to use them when retirement comes. Setting up a plan before you retire is the best way to be successful.
2 traditional retirement withdrawal strategies that may work for you
1. Retirement withdrawal strategies to know: Fixed withdrawals
The fixed withdrawal strategy can operate in two ways. You can select a fixed amount based on either dollar value or percent of total assets. Each of these has its strengths and weaknesses.
By settling on a fixed amount, you can be sure of how much income you will have each year. At the same time, removing this amount from your account every year without regard to inflation or market conditions could quickly eat away at your spending power or find you cutting corners even when unnecessary.
With a fixed withdrawal based on percentage, your withdrawals will fluctuate with the balance of your account. This means it will be more challenging to know what your income will look like from year to year, but it also means your withdrawals will take market conditions into account.
2. Retirement withdrawal strategies to know: The 4% Rule
While the above strategies don’t take the inflation rate into account, the 4% rule is meant to maintain your purchasing power against inflation. The 4% rule states that you would withdraw 4% of your account’s balance every retirement year. Thus, if you started retirement with $1,000,000 in the account, you would take $40,000 each year.
However, the 4% rule also accounts for inflation year-over-year. So, you would add 2% (the Fed’s target rate) to that $40,000 the following year and withdraw $40,800. The next year you would add an additional 2%, and so on, moving forward into the future.
While this has been the preferred strategy of many money managers for years, it has recently come under some scrutiny as it may be outdated and could drain your account too quickly. No matter what strategy you use, it has to fit your situation. This includes the money you need from one year to another (realistically) and how long you need it to last.
What are your biggest concerns about your money going into retirement?