A Surprising Retirement Withdrawal Strategy Could Leave You With More Money Later
It's an approach worth taking.
By Maurie Backman
When you retire, one of the biggest financial decisions you'll face is how much money to withdraw from your savings each year. Many retirees rely on a fixed withdrawal strategy, often based on the widely known 4% rule. Under this approach, you withdraw a set percentage of your portfolio and adjust that amount for inflation each year.
While that strategy is certainly easy to implement, it's not necessarily the best way to preserve wealth. You may want to take a more flexible and adaptable approach if your priority is making sure your money lasts as long as you want it to.
You can protect your portfolio by adjusting withdrawals continuously
One of the biggest problems with a fixed retirement withdrawal strategy is that you're removing the same amount of money from your IRA or 401(k), regardless of how the market is doing.
If you continue taking the same dollar amount out of your savings during a market downturn, you may be forced to sell investments at lower prices. That could permanently reduce the size of your portfolio and make it harder for your savings to recover when the market rebounds.
That's why a flexible withdrawal strategy is often a better bet. With a flexible approach, you might temporarily reduce discretionary spending when the market experiences a significant decline. By withdrawing less money during downturns, you leave more assets invested in your IRA or 401(k) plan and give your portfolio a better chance to recover.
Of course, this also means that when the market outperforms, you should have the flexibility to increase withdrawals. You could even take advantage of high-performance years by banking extra funds, so you don't have to reduce discretionary spending as much during downturns.
You may end up with more money later in retirement
Instead of treating retirement income as a fixed paycheck, adjusting your spending and withdrawals based on market conditions could leave you with a more robust portfolio later on in retirement. That could become crucial if you wind up needing long-term care or face other major costs, like expensive home repairs.
Plus, if part of your goal is to leave a legacy to your heirs, a more flexible withdrawal strategy could be the ticket to making that happen.
To be clear, your objective should not be to spend as little money as possible each year. Rather, you should simply keep your retirement plan withdrawals dynamic, so you have more flexibility and less financial stress later in life.