Retirement Withdrawal Strategies To Extend Your Savings

You’ve saved, invested and planned — and now you’re finally ready to retire. But in some ways, the hard work is far from over because you still need to answer a very important question: How do you turn that nest egg into sustainable income without running out of money?

One of the biggest fears retirees face isn’t market crashes or medical costs — it’s simply running out of cash. And that fear is real.

A comfortable retirement requires more than money in the bank. You’ll need to know how to strategically stretch those savings across what could be 30 or more years of post-work life. How and when you take the money out can make or break your retirement plans. Withdraw too much too soon, and you may be left with insufficient funds when you need the money most.

These are some of the top strategies financial experts recommend — plus other steps you can take to avoid the dreaded scenario of outliving your money later in life.

4 top retirement withdrawal strategies

Here are four expert-recommended retirement withdrawal strategies to help your nest egg last throughout your life.

1. The 4% rule

The 4% rule suggests withdrawing 4 percent of your portfolio in your first year of retirement. The dollar amount of that withdrawal is then increased each year by the rate of inflation. For example, if you have a $500,000 nest egg, your first year withdrawal is equal to $20,000, which is 4 percent of $500,000.

In year two, the $20,000 withdrawal is increased by the rate of inflation. If inflation was 3 percent, then the withdrawal in year two is $20,600. If inflation remained at 3 percent the following year, then the withdrawal in year three would be $21,218 — up 3 percent from the previous year’s withdrawal of $20,600.

But is 4 percent the right amount to withdraw in year one?

Wade Pfau, a retirement researcher and director of retirement research at McLean Asset Management, advocates for a withdrawal rate less than 4 percent. When the market fell in 2020, he even put it as low as 2.4 percent.

Pfau calculated that a 4 percent withdrawal rate, coupled with a declining market in the early years of retirement, could drain your nest egg too quickly.

In other words, if the market tanks early in your retirement and you’re withdrawing a fixed amount, you risk “sequence of return” damage — pulling out too much too soon, reducing your portfolio’s ability to rebound.

2. The fixed-dollar strategy

This strategy is exactly what it sounds like: You pick a specific dollar amount to withdraw each year, and you reevaluate that amount every few years based on how your investments perform.

“A benefit to the fixed-dollar strategy is that retirees know the exact amount of money they will be receiving each year,” says Julie Colucci, a CFP and wealth advisor at New England Investment and Retirement Group in Naples, Florida.

However, the downside of withdrawing a fixed amount every year is it isn’t adjusted for inflation. If the market goes sideways, your fixed withdrawals might not be sustainable long term.

“This strategy faces the same downfalls as the 4 percent rule when faced with volatility,” says Colucci.

3. The total return strategy

With the total return strategy, the goal is to remain fully invested as long as possible. Your portfolio remains invested mostly in growth assets like stocks, and you only pull out what you need for the next few months — say, three to 12 months’ worth of living expenses.

“This strategy works well for retirees who can tolerate more risk and whose plans may have a greater capacity for managing risk,” says Hali Browne London, a CFP.

So if you’re comfortable with risk and have a solid financial cushion, this strategy can work well.

The downside? The total return strategy can expose your portfolio to higher potential gains as well as losses. If you need to tap your accounts when the market’s down, you may be forced to sell low or reduce your living expenses.

“Ultimately, the total return strategy can prove to be a successful approach as more assets remain invested long-term, but it should be used for clients that have a good handle on market performance and can handle the volatility and optics of selling even when markets are down,” says London.

4. The bucket strategy

With the bucket strategy, you leave money invested in high-return assets for longer periods while taking out cash for short-term needs.

To implement it, divide your money into three buckets based on when you’ll need it:

• Bucket 1: Cash for the next six to 12 months (kept in a high-yield savings account).
• Bucket 2: Money for the next one to three years (invested in bonds, CDs and other low-risk investments).
• Bucket 3: Long-term funds (invested at least partly in assets with higher returns, such as growth ETFs and stocks).

You pull from bucket 1 first, then refill it from the others as needed. It helps protect short-term cash flow while still investing for long-term growth.

“The advantage of this strategy is that the retiree has insulated themselves from market volatility and the next 12-36 months of expenses (buckets 1 and 2) are safer and provide a great deal of comfort and security,” says London. “Meanwhile, they can benefit from the potentially positive outcome from market volatility – increased returns – on the funds invested in bucket 3.”

While the bucket strategy can offer some peace of mind and flexibility, it can also add complexity to your retirement plan since it requires regular rebalancing and monitoring.

What else impacts how long your money lasts in retirement?

Choosing the right withdrawal strategy is a huge part of the retirement planning puzzle — but it’s not the only piece. Other factors can have an equally big impact on the longevity of your nest egg.

Here are some additional factors to consider.

Tax implications

Taxes play a major role in retirement planning, and thinking strategically here can save you thousands of dollars over time. Traditional IRAs offer different tax advantages than Roth IRAs, for example. Traditional 401(k) plans offer different advantages than Roth 401(k)s.

It often makes sense to pull from tax-deferred accounts — such as a traditional IRA — first when you’re in a lower tax bracket, and save Roth accounts for later.

“Roth assets are generally the last assets that are withdrawn as they are income tax-free when distributed,” says Colucci.

By planning ahead, you can reduce how much money you send to Uncle Sam and keep more of it in your own pocket.

Required minimum distributions

Starting at age 73, you’ll need to start taking required minimum distributions (RMDs) each year from certain retirement accounts. RMDs force you to take money out — whether you want to or not — otherwise you’ll face stiff IRS penalties.

The exact amount you’ll need to withdraw changes from year to year. It’s based on your life expectancy and is calculated using a table provided by the IRS.

However, Roth IRAs don’t require RMDs during your lifetime. That’s another reason why it’s smart to tap Roth funds later in retirement. This way, when Uncle Sam forces you to make withdrawals, at least you won’t owe taxes on the money.

Your gender

Women will likely need to take additional steps to ensure they don’t outlive their savings. The gender wage gap is closing, but men still make more money than women on average. Lower earnings make it harder to save and also lower Social Security payouts.

Women also live longer than men, so that smaller pot of money needs to stretch even longer.

While Social Security does offer spousal benefits, it doesn’t fully make up for years of lower earnings. That’s why women need to be strategic. Depending on the timeline, women may need to take on more investment risk or find other ways to grow their savings or income before retirement.

Marital status

Your situation will also depend on whether you’re single or married because you might be able to lean on your partner for financial support.

“Couples should look at their collective retirement savings and benefits and make decisions together,” says Chad Parks, founder and CEO of Ubiquity Retirement + Savings in San Francisco.

For example, if one partner has a pension, a joint and survivor option might be available.

“That means if the primary person on the pension plan passes, regular payments continue as long as one spouse lives,” says Parks.

However, the monthly amount is usually smaller to account for the extended coverage.

If a pension isn’t in the picture, you and your spouse may consider a joint-life annuity. It functions similarly to a pension — the surviving spouse continues receiving a monthly payout after the first spouse dies. The big difference is an annuity is self-funded and managed by a life insurance company instead of a former employer.

Social Security

Social Security is the one guaranteed check most retirees can count on for life, making it the backbone of most retirement plans. But how and when you claim Social Security matters.

You can start collecting Social Security as early as age 62, but doing so locks in a lower monthly benefit for life. Wait until full retirement age — usually 66 or 67, depending on when you were born — and you’ll get your standard payout. Delay even longer, up to age 70, and your benefit grows by about 8 percent per year.

That bump in monthly income can add up over time, especially if you live into your 90s.

Beyond timing your benefit, think about taxes. With careful planning, you might be able to keep your taxable income low enough to qualify for tax-free Social Security benefits — or at least get taxed at a lower rate.

Reducing your expenses

Another way to avoid outliving your money is to reduce what you need in retirement.

Cutting expenses doesn’t have to mean sacrificing your lifestyle. In many cases, it’s about being intentional. That might mean downsizing your home to save money on property taxes and maintenance costs. Or you might consider relocating to a state with no income tax. Even small moves — like cooking more at home or dropping a second car — can add up fast.

But the biggest savings can come from steps you take before retirement. For example, by paying off your mortgage or car loan while you’re still earning money, you’ll reduce what you need to pay out later. Lower monthly bills also give you more flexibility when markets are down.

Bottom line

Whatever withdrawal strategy you use, make sure it aligns with your overall goals and needs — and remember to think long term. Planning for your future decades out can be complex, so hiring an independent financial advisor to help you navigate the process is a smart move. Here’s how to find an advisor who will work in your best interest.

— Bankrate’s Greg McBride contributed to an earlier version of this article.

Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making an investment decision. In addition, investors are advised that past investment product performance is no guarantee of future price appreciation.