After decades of saving for retirement, you face a new challenge: how do you transform that nest egg into steady monthly income that will last the rest of your life? The shift from accumulating wealth to spending it down feels uncomfortable for many retirees, especially when market swings can affect your account balance from month to month.
The good news is that you have several proven strategies to create reliable income from your retirement savings. Each approach has its own benefits and trade-offs, and the right choice depends on your personal situation, risk tolerance, and income needs. Understanding these options helps you make informed decisions about how to structure your retirement income.
The 4% Rule Foundation
How It Works
The 4% rule serves as a starting point for many retirement income strategies. You withdraw 4% of your portfolio in the first year of retirement, then adjust that amount each year for inflation. If you have $1 million saved, you’d withdraw $40,000 in year one, then increase that amount based on cost-of-living changes.
Updated Guidance
Researchers now recommend a starting safe withdrawal rate of 3.7% for 2024, down from the traditional 4%. This adjustment reflects higher stock valuations and lower bond yields, which have reduced return expectations for the next 30 years.
Fixed Dollar Withdrawal Strategy
Predictable Income
This approach involves withdrawing the same dollar amount each year, regardless of market performance. You determine how much income you need annually and stick to that amount, adjusting only for inflation when necessary.
Benefits and Drawbacks
Fixed dollar withdrawals provide predictable budgeting and cash flow. However, this strategy doesn’t adapt to market conditions, which could lead to depleting your portfolio faster during bear markets or leaving money on the table during strong market years.
Percentage-Based Withdrawal Strategy
Flexible Approach
With this method, you withdraw a fixed percentage of your current portfolio balance each year, typically between 3% and 5%. Your income fluctuates with your account value, providing more money during good market years and less during downturns.
Market Responsiveness
This strategy automatically adjusts to market conditions. When your portfolio grows, your withdrawals increase. When markets decline, your withdrawals decrease, helping preserve your principal for future recovery.
The Bucket Strategy
Two-Bucket Framework
The bucket strategy divides your retirement savings into two separate pools based on when you’ll need the money. The first, short-term bucket covers the next 5-7 years with stable investments. The second bucket can take risk and holds moderately aggressive investments for years 7+. For folks over 10 years to retirement, you may also wish to consider adding a third bucket for aggressive investments. This bucket will be your protection against inflation 15-20 years from now.
Implementation Benefits
This approach provides cash flow stability while maintaining growth potential. You withdraw from the conservative bucket during market downturns, allowing your growth investments time to recover before you need to tap them.
Required Minimum Distributions
IRS Requirements
Once you reach age 73 (or age 75 for those born in 1960 or later), the IRS requires you to take minimum distributions from tax-deferred accounts like traditional IRAs and 401(k)s. These required minimum distributions (RMDs) increase each year based on your account balance and life expectancy.
Using RMDs as a Base
Some retirees use their RMDs as a foundation for their withdrawal strategy, taking additional amounts as needed. This ensures compliance with tax rules while providing a structured approach to portfolio withdrawals.
Dynamic Withdrawal Strategies
Guardrails Approach
Dynamic strategies adjust your withdrawals based on portfolio performance and market conditions. The guardrails method sets upper and lower limits for your spending. If your portfolio performs well, you can increase withdrawals and stay within the lower guardrail. Poor performance triggers spending cuts that may stay just below the upper guardrail.
Flexible Spending Benefits
These strategies help your portfolio last longer by reducing withdrawals during poor market conditions. However, they require more active management and the willingness to adjust your lifestyle based on market performance.
Annuities With Income Guarantees
Annuities with guaranteed income may provide for greater income security. Even if you run out of money, your income will continue to last until your death.
There are tradeoffs with income annuities. While they provide for some long-term stability, they provide less access to principal for emergencies. They also have a cost; while this cost is often borne by the value of the estate at death, it is still a cost that should be factored into the equation. In exchange for that cost you may be able to set a higher withdrawal amount due to the long-term income security.
Tax-Efficient Withdrawal Sequencing
Account Order Strategy
The order in which you withdraw from different account types affects your tax burden. Generally, you should first tap taxable accounts, then tax-deferred accounts, and finally tax-free Roth accounts. This sequence may help optimize your taxes and may maximize tax-free growth.
Roth Conversion Opportunities
During low-income years or market downturns, consider converting traditional IRA funds to Roth accounts. This strategy spreads out the tax burden and creates more tax-free income for later years.
Combining Multiple Strategies
Layered Approach
Many retirees benefit from combining several income strategies. You might use RMDs as a base, maintain a small cash bucket for flexibility, purchase a partial annuity for security, and manage a growth portfolio for inflation protection.
Flexibility and Security
A multi-strategy approach provides both the security of guaranteed income and the flexibility to adjust for changing needs and market conditions.
Factors Affecting Your Choice
Risk Tolerance
Your comfort with market volatility should guide your strategy selection. Conservative investors might prefer more guaranteed income sources, while those comfortable with risk might favor market-based approaches.
Health and Longevity
Your expected lifespan affects which strategies make sense. If you expect a long retirement, you need more growth to combat inflation. Shorter life expectancies might favor immediate income maximization.
Work With Us
Converting your retirement savings into a reliable income stream requires careful planning and an understanding of various withdrawal strategies. From the traditional 4% rule to dynamic approaches that adjust with market conditions, each method offers different benefits and trade-offs. The key is finding the right combination of strategies that match your risk tolerance, income needs, and personal circumstances while providing the freedom and flexibility you need in retirement.
At Brogan Financial, we specialize in helping retirees create comprehensive income strategies that maximize their savings while minimizing risk. Our team can help you evaluate different withdrawal approaches, implement tax-efficient strategies, and adjust your plan as your needs change over time. Contact us today to develop a personalized retirement income strategy that gives you confidence and freedom throughout your golden years.
