Managing retirement withdrawals can be tricky, but experts say the 4% rule is a good starting point. The rule suggests withdrawing 4% of your savings in the first year, then adjusting for inflation each year after. For example, if you have $500,000 saved, you would take out $20,000 the first year.
Then you would increase that amount based on inflation rates in the following years. “The 4% rule is a general rule of thumb that is best used as a starting point to a more tailored spend-down approach,” said Lauren Wybar, senior wealth analyst. It is most effective to plan your spending around your specific situation — portfolio allocation, income sources, and estate planning goals.
Rob Williams, managing director of financial planning, agreed that 4% is a good starting point.
But he said it can be hard to stick to in real life. Another approach is to divide your savings into different “buckets” based on when you will need the money. This could be short-term, medium-term, and long-term buckets.
The bucket approach or multi-goal approach allows one to invest according to their specific time horizon,” Wybar said. “The shorter the time horizon, the more conservative the bucket of assets should be.”
Williams likes to use two buckets. The first is for the next two to four years and is kept stable and easy to access.
The second is for money needed after four years and focuses more on growth. Annuities are another option to consider. They are contracts with insurance companies where you pay a lump sum or series of payments.
Adapting to individual retirement plans
In return, you get regular payments back, either right away or in the future. However, annuities can have high fees, limited flexibility, and confusing terms.
There’s no one-size-fits-all approach to retirement planning,” Wybar said. “So annuities can make sense for some individuals.”
In times of economic uncertainty, you may wonder if you should change your withdrawal plan. Experts say not to overreact, but you could think about taking out a smaller percentage for a while.
“The red flag has gone up on the race track a little bit,” Williams said. “Let’s see how it clears. Maybe cut back a little bit on your withdrawals, if you can.”
It’s also important to have an emergency fund separate from your retirement savings.
This can help with unexpected costs like medical bills or home repairs. The most common pitfall is losing sight of a rainy day or emergency fund, as unexpected expenses can really derail the longevity of one’s portfolio,” Wybar said. She recommends saving $2,000 or half a month’s expenses, whichever is more, in an account that is low-risk but easy to access.
This can help you avoid credit card debt and protect your nest egg. When in doubt, think about talking to a financial advisor. They can provide valuable insights and create a plan tailored to your specific needs and situation.
This is especially helpful as the economy and your personal circumstances change over time.
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