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3: Analyze Your Decisions

Drawing Income During Retirement


How do you get paid? Is it through regular paychecks, with bonuses and cash tips supplementing that income? Do you receive alimony or child support payments? Maybe you receive benefits from the government or an insurer due to disability or something else? No matter which of these apply to your situation, it’s important to note that you don’t have much control over how much they are or when you receive payment.

Retirement is different. You get to decide how much, in addition to a pension or Social Security benefit, you get paid and when. You will need a plan for how to save, invest and draw down resources to provide the regular stream of income you need for your retirement lifestyle.

Drawing Down Your Savings and Investments for Retirement Income

Many retirement advisors recommend that you limit your withdrawals from savings and other retirement sources to 4 percent of your account balance in your first year of retirement. Thereafter, you need to adjust withdrawals for inflation (e.g., year two might be another three percent of the previous year’s withdrawal).

For example, starting with $100,000 in your retirement accounts, you would withdraw $4,000 in the first year (4 percent of the value). In the second year, you would withdraw $4,120 (this is 3 percent more than the previous year).

You can see how quickly this guideline* eats into your retirement savings. The overall objective is not to withdraw too much; you don’t want to outlive your money. As a nation, we are living longer every year, so a good plan is to have your money last at least 20 to 30 years in retirement depending on your retirement age.

*Note: this guideline assumes you invest at least half of your assets in stocks or stock mutual funds. If you’re more conservative, you may need to withdraw a lower amount to have a good chance of your savings lasting 30 years, but this is just a guideline. It may not apply to you and your circumstances.

Sequence Your Withdrawals

Depending on your circumstances and sources for retirement income, the sequence in which you withdraw can have significant implications.

Generally speaking, unless your retirement assets are substantial, consider withdrawing money from retirement savings in the following order:

  1. Taxable accounts (e.g., savings outside of a tax-deferred retirement savings plan), because withdrawals may qualify for lower dividend and capital gains tax rates versus higher ordinary income tax rates.
  2. Tax-free investment accounts because earnings are free from state and/or federal income taxes.
  3. Tax-deferred retirement accounts such as 401(k)s, 403(b)s, and traditional IRAs, so you potentially can delay paying taxes on this money as long as possible (preferably until the time that RMD withdrawals are required).
  4. Tax-free retirement accounts such as Roth IRAs, because waiting to withdraw that money will allow it to grow. There is no RMD withdrawal requirement, and the money can continue to grow unhindered by taxes.

Regardless of your income level, it is wise to seek qualified tax and legal advice for these complex decisions, especially if you plan to leave money to others as an inheritance.

Match Your Retirement Income to Your Expenses

Just as you use a spending plan in your working years for meeting your expenses and saving for the future, you need to divide your retirement expenses into essential and nonessential expenses.

  • Essential expenses: This includes items like food, clothing, utilities and health care. Use Social Security or annuity incomes to pay for these expenses. If necessary, work longer (delaying your Social Security benefits) or part time to increase your income. You can also convert some of your retirement savings into an immediate annuity to meet your essential expenses.
  • Nonessential expenses: These can include expenses like travel, eating out or entertainment. Use your retirement savings to pay for these items.

retirement spending piggy bank

Classify Your Expenses


Often when we dream about retirement, we think about what we will do, but not how to pay for it. Think about your ideal retirement lifestyle and the expenses you anticipate during retirement.

  • What do you know about the timing and frequency of these expenses?
  • Can you classify them into essential and nonessential?
  • What funds do you already have in place as you contemplate paying for these expenses in retirement?
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