How to withdraw money in retirement
How do I withdraw from my retirement accounts
Creating a retirement income plan can help you decide when and how to withdraw money from your retirement accounts. Knowing your balances and how much of your retirement income is in a guaranteed asset class can help you understand how much, and when, to start drawing down from specific accounts.
There are different ways to take money from your retirement accounts. The strategy that’s right for you depends on your age, income needs, and how comfortable you are with the level of risk in your investment mix.
The investment mix that's right for you
Before deciding on a withdrawal strategy check your investment portfolio to make sure your investments are still in line with your long-term goals. Even in retirement, it's important to balance growth investments (like stocks) with ones that historically have experienced lower volatility than stocks (like bonds).
Retirement could last for more than 30 years. Inflation can reduce the value of your money, so it's important to have some growth investments that have the potential to match or outpace it.
Common withdrawal strategies
Here are three common strategies for withdrawing money in retirement:
Strategy 1
Fixed percentage or 4% rule
One option many experts recommend suggests that withdrawing no more than 4% of your retirement savings each year can help lessen your chances of running out of money. For example, if you have $1 million in savings, you will withdraw $40,000 or less to live on each year (after adjusting for inflation). This method aims to help your money last at least 30 years. There are a few considerations to remember, though:
- Low interest rates can reduce the income that bonds ultimately provide
- Inflation can lead to larger withdrawals over time
- Stock market downturns can shrink your portfolio
- Your income needs may not be steady from year to year which can make relying on the same amount each year a little tricky
Strategy 2
Investment Buckets
As the name suggests, the bucket strategy divides your assets into different "buckets". One bucket may hold cash or fixed-income investments for immediate needs, while another holds growth investments over a longer period. This can reduce market risk and help manage your income.
Work with your financial professional to determine an asset allocation that best reflects your needs. While this approach can help reduce market risk, neither rebalancing nor asset allocation can eliminate the risk of investment losses.
Strategy 3
Interest-only income
You can plan take only the interest from your eligible investments as income until you're required to take minimum distributions at age 73. This strategy allows you to switch to another income option after the first year and can be useful as you transition from your job or are waiting on other sources of income to begin.
Just remember, withdrawals of earnings from a retirement account or an annuity are subject to ordinary income tax, plus a possible federal 10% penalty if you withdraw before age 59½.
Risks and withdrawal strategies
As you get ready to retire, you'll likely need to shift your focus from saving to generating income. Pay special attention to risks like outliving your savings, inflation outpacing your investments, and market volatility.
You can manage these risks by building certainty into your plan with annuities and other guaranteed income sources.
Next steps to think about before
retirement
Create a retirement budget
Estimate your living expenses and discretionary spending to prepare for retirement costs.
Decide on a retirement date
When you retire will be an important factor in your overall withdrawal strategy.
Cover essential expenses with guaranteed income
Use guaranteed lifetime income to cover essential expenses, reducing the need for regular portfolio withdrawals.
Calculate safe widthdrawal amounts
Understand how much you can safely withdraw to generate regular income.
This material is for informational or educational purposes only and is not fiduciary investment advice, or a securities, investment strategy, or insurance product recommendation. This material does not consider an individual’s own objectives or circumstances which should be the basis of any investment decision.
Investment products may be subject to market and other risk factors. See the applicable product literature or visit TIAA.org for details.
Retirement check refers to the annuity income received in retirement. Guarantees of fixed monthly payments are only associated with TIAA's fixed annuities.
Investment decisions should be made based on the investor's own objectives and circumstances. Advice is obtained using an advice methodology from an independent third-party.
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