After spending most of your life saving for retirement, the time has finally come to start using your investment portfolio. However, this step can be unsettling: what if the money runs out? What if you spend too much or too little?
The answers to these questions ultimately depend on how much you have saved and your specific lifestyle and spending habits. But experts do have some universal rules to consider. Let’s explore several common strategies.
The 4% Rule suggests withdrawing 4% of your investment portfolio in the first year of retirement. The subsequent annual withdrawals should increase based on an inflation rate. While this is a relatively straightforward strategy, it may pose a threat to your asset allocation during market downturns. However, many experts believe this strategy can sustain your portfolio for at least 30 years. Therefore, it is recommended to consider inflation and market conditions when applying this rule.
The Fixed Withdrawal strategy involves withdrawing a set amount each year after retirement. Similar to the 4% rule, it may carry more significant risks as it does not adjust based on inflation. This method is suitable for those expecting relatively stable annual expenses without plans to increase spending. However, it is also susceptible to market volatility and may deplete funds during market downturns.
The “Bucket” strategy divides retirement savings into three parts: short-term, medium-term, and long-term.
The short-term bucket includes funds needed for the first three to five years of retirement, which should be invested in relatively safe assets like cash and short-term bonds.
The medium-term bucket is for expenses within the following five to ten years and should be allocated to investment-grade bonds, certain stocks (such as utilities and consumer staples), and Real Estate Investment Trusts (REITs).
The long-term bucket caters to growth investments for the entire retirement period, allowing for considerations of stocks and long-term bonds.
This strategy determines how funds are withdrawn based on the types of retirement accounts you have to minimize tax burdens. During high-tax years, consider withdrawing from tax-free accounts like Roth IRAs or Roth 401(k)s.
If you have substantial principal, you can let the principal continue to grow while relying primarily on interest and dividends for living expenses in the early stages of retirement. However, this strategy heavily relies on market conditions and may face significant income volatility during market turbulence.
Required Minimum Distributions (RMD) mandate that once you reach age 73, you must annually withdraw a minimum amount from traditional IRAs and 401(k) accounts. For individuals turning 74 after 2032, the RMD starting age will increase to 75. This amount is calculated based on the IRS’ life expectancy tables. Failure to withdraw at least the RMD each year could result in high tax penalties.
The amount of funds you should withdraw throughout retirement varies from person to person. Consider savings size, financial needs, lifestyle, inflation, and market conditions holistically. Discussing your withdrawal strategy with a qualified financial advisor can be beneficial.
The original article titled “Retirement Drawdown Strategies” was published on the English version of Dajiyuan Times’ website. ©2025 Dajiyuan Times. The perspectives and opinions expressed in this article are solely those of the author for general informational purposes and do not constitute any recommendation or solicitation. Dajiyuan Times does not provide investment, tax, legal, financial planning, real estate planning, or other personal finance advice. Dajiyuan Times does not guarantee the accuracy or timeliness of the article content.