It would be nice if saving for retirement was all we had to do. Turns out, we also need to decide on the best way to pull out our savings once we retire. Here are the two popular strategies that people use in retirement:

 

The 4% Rule

What Is It? The 4% rule is a guideline published in 1994. It promoted that figure as a safe, annual withdrawal rate after back testing its performance.

Using the 4% rule, you can withdraw 4% percent of your investable assets in the first year of retirement. In the subsequent years, you are suggested to take the same dollar amount with an adjustment for inflation.

For example, say you have $800,000 in retirement savings. That first year, you’d withdraw $32,000. The second year, you’d withdraw $32,960, accounting for a 3% rate of inflation.

Pros: This is a pretty easy rule to wrap your head around. Operationally, you can accomplish this at low cost with some robo investors and diversify with the indexes.

Cons: You are drawing income from a fluctuating account. Sure, all accounts you draw from will compromise the gains in the up years. When the markets go down, you accentuate the losses, which is the real killer. If the markets only went up, this could be a viable option. Historically, markets crash every 7-8 years, which put significant burden on your assets while making your income very expensive. You leave your income and retirement to the whims of the market.

 

The Bucket Strategy

What Is It? You divvy up your savings into separate account types based on your goals. That could be as simple as three buckets: emergency savings, living expenses, and long-term savings.

For example, you could have three months’ worth of emergency savings in a savings account. Then, you could have, say, three years’ worth of living expenses, with one year of that in a savings account and two years’ worth in another fixed investment. Then, your longer-term savings can be invested.

Pros: A bucket strategy reduces your exposure to market risk because you don’t have to sell stocks when the market is down. You’ve got cash on hand to pay your expenses, which can protect your savings over the long haul.

Cons: You still need a withdrawal strategy for your invested savings. It takes time to plan out a bucket strategy.

This is a good strategy for people who get nervous about running out of money before you die. No matter what you see in the news or what big drop just happened in the stock market, you don’t have to worry because you can ride it out for a few years.

Based on our research, the bucket strategy has helped more people in retirement than any other strategy. At Decker Retirement Planning, we took this idea and ran with it to create A Safer Distribution Plan, which allows clients to see, down to the month, net of tax, how much they can spend for as long as they live. Though our method is a bit more technical than how the Bucket Strategy was presented in this article, the theory still stands.

Whichever strategy you decide is best for you, we hope that you please consider the Principles that Govern Proper Retirement Planning as your guidelines for a strong retirement plan.

 

Tips For Any Retirement Approach
  • Don’t forget taxes. If you’re withdrawing money from a traditional IRA or 401(k), you’re going to owe income tax on that money. Be sure to factor that into your retirement income plans. (That’s one reason why a Roth IRA can be a relief come retirement: you pay taxes as you go and not when you’re withdrawing the money).
  • Revisit your plan at least once a year. This isn’t a situation where you’re going to set it and forget it. Things change, markets rise and fall, and unexpected expenses arise. Check in with your plan regularly to make sure you’re on track.
  • Remember your other income sources. Most of these withdrawal strategies are focused on your retirement savings — the stash of money you have control over. Don’t forget to factor in Social Security benefits and any other sources of income when thinking about your overall retirement plan.
  • Ditch the debt, if you can. Financing your retirement will be a lot easier without debt.  Not having any debt going into retirement will significantly reduce your fixed expenses.
  • Flexibility can be your friend. If you go into retirement being flexible and not having to have the exact same dollar amount every year, that gives you a better chance of not running out of money in retirement, because you can adjust as you go.

 

In Conclusion

Retirement is full of surprises, and the strategies you came up with at 55 might not be best by the time you’re 75 . Retirement planning isn’t a one-time occurrence.  Having a plan with built in flexibility is critical to enjoying retirement how you intended to do so.