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What Happens When You Stop Saving for Retirement and Start Spending?

“It’d be nice if saving for retirement was all we had to do. It turns out, we also need to decide on the best way to pull out our savings once we retire.”


Probably the best known is the 4% Rule. Published in 1994 by a retired financial planner, this number was said to be a safe annual withdrawal rate, after it was tested on the toughest financial crises in history, including the 1929 Great Depression. Using that rule, you withdraw 4% from your savings in the first year of retirement and then take out the same dollar amount, adjusted for inflation in the years that follow.

Let’s say you have $800,000 in retirement savings. You’d take out $32,000 for the first year. The next year, inflation is at 3%. Therefore, you’d take out $32,960 the next year. As long as half of your savings are invested in a portfolio that does better than 4%, you’re okay. However, this plan is also inflexible and doesn’t account for how spending patterns change or how markets dip.

Another approach is known as “Dynamic Withdrawals.” This comes in many different types, but the essence is that you change your withdrawal amount when things change, like investment returns. This approach lets you make sure your retirement accounts will last as long as you need them to. If your investments are not performing, it makes sense not to pull out more money. Or, if you had an emergency that required a lot of money in the previous year, you take out less the following year. The downside: this can get complicated.

There’s also the “Bucket Strategy.” You split up your savings into different types of accounts, based on your goals. It’s a very personal approach. For example, let’s say you set them like this: an emergency savings, living expenses and long-term savings. You might put six months (or years, depending on the health of your retirement accounts) into an emergency savings account. Then you’d put three years of living expenses aside, with one of the three years in a savings account and two years’ worth in a bank CD. Your longer-term savings would then go into stocks and bonds.

The idea is to spread out your risk across a number of different savings vehicles. You will have cash on hand, when the markets are volatile. You also don’t have to sell into a down market.

Whatever your withdrawal approach, don’t forget these basics:

Don’t forget about your tax burden. If you take money out of a traditional IRA or a 401(k), you’re going to need to pay income tax. That can be avoided with a Roth conversion. An estate planning attorney can help you with tax planning.

Review your plan annually. Like your estate plan, this is not a one-time situation. Life and laws change, and you will need to make changes too.

Look at other income sources. The withdrawal strategies don’t include Social Security or any other income sources, like part time work.

Eliminate as much debt as you can. That reduces fixed expenses, which can take a bite out of your retirement.

Be flexible. Adjusting withdrawals as you go, will give you much more control over your retirement funds.

Reference: Nerd Wallet (Oct. 31, 2018) “Retirement Withdrawal Strategies: Which Should You Use?”

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