Five retirement withdrawal strategies to maximize your savings

1 min readLast updated November 10, 2023by Rachel Carey

Reaching retirement takes years of saving, investing, and savvy financial decision-making. But how do you make the most of your savings once you retire?

Retirement brings new challenges, mainly around money and making sure it goes the distance. To ensure you have a comfortable retirement, it’s vital you map out how you plan to withdraw and spend your money.  

Here are some tips to get you started.  

When can I access different retirement savings? 

The IRS makes it harder for people to access their tax-advantaged retirement funds before the age of 59 years and six months. 

If you do access your retirement funds before this age, you could be hit with a 10 percent early withdrawal tax penalty and face additional taxes on your balance. 

Here is a breakdown of when you can access what: 

  • Age 59½: You can now withdraw from your retirement accounts without any tax penalties.

  • Age 62: This is the minimum age you can start receiving Social Security benefits.

  • Age 67: If you were born after 1959, this is the age you become eligible for full Social Security benefits.

  • Age 72-73: You must begin taking minimum withdrawals from most retirement accounts each year at 72 (or 73 if you reach 72 after December 31, 2022).

As mentioned, when you reach the age of 72, or 73 if you reach 72 after December 31, 2022, and 70 ½, if you reach this age before January 1, 2020, you must make the required minimum distributions (RMDs). These are the minimum amounts you must withdraw from your retirement account each year.   

If you fail to take the correct distributions, you will be subject to an additional tax equal to 50 percent of the undistributed RMDs.   

Further adding to the complexity is the rule of 55.  

The rule of 55 is a legal but little-known loophole that allows you to withdraw from your retirement funds from age 55 and retire early. 

Crucially, you won’t incur the 10 percent tax penalty and can enjoy the entirety of your funds. If you’re fired, laid off, or choose to leave your job during the calendar year of your 55th birthday, you can begin withdrawing funds from your employer-sponsored retirement fund – 401(k) or 403(b) – if your provider allows it.  

How should I withdraw my retirement savings? 

It pays to be strategic when withdrawing money from your retirement savings accounts.  

Unfortunately, there is no one-size-fits-all withdrawal strategy.  

When it comes to deciding what account to withdraw from first, the best practice to follow is: 

  1. Withdraw from taxable investment accounts first 

  2. Withdraw from tax-deferred accounts, such as your 401(k) or traditional IRA, next 

  3. And withdraw from tax-free accounts, such as your Roth IRA, last 

This strategy works best for retirees who do not plan to leave a large estate to their beneficiaries. For those who want to leave a large estate behind, you must coordinate your withdrawals with your estate planning.   

Five retirement withdrawal strategies  

When determining how to withdraw your 401(k) and other retirement accounts, you need to be mindful of your situation and goals, including the value of your assets, how much you plan to live off each year, projected investment returns, and lifestyle goals. 

Here are some of the most popular withdrawal strategies:  

1. Four percent withdrawal rule 

This strategy starts by withdrawing only four percent of your retirement savings in the first year. In the following years, add two percent to adjust for inflation.  

For example, if you have $1 million in savings, you would withdraw $40,000 in the first year. Adding the two percent to adjust for inflation the following year means your income grows to $40,800. If inflation is higher or lower you will need to adjust by that amount.  

One of the main advantages of this strategy is that it provides you with a predictable yearly income. However, one main drawback is that it does not account for rising interest rates and market volatility. 

2. Fixed-dollar withdrawals 

With this strategy, you withdraw a fixed amount over a set period.  

For example, you could withdraw $50,000 annually for five years. After this period, you assess this  amount to determine if this strategy works. 

Like the four percent rule, this strategy provides a fixed annual income. However, it does not account for or protect against inflation.  

3. Fixed-percentage withdrawals 

If you opt for this strategy, you will consistently withdraw a fixed percentage of your account balance each year. The amount you withdraw will vary as your investment account balance rises and falls.  

This is a fairly simple strategy to follow, but as it does not provide you with a fixed annual income, it can be difficult to plan ahead and know how much will be in your bank account each year.  

4. Bucket strategy 

Here, you split your savings into different accounts based on your expenses, for example, three “buckets” for your short-term, mid-term, and long-term needs. This can also be broken into years: bucket one: 0-5 years, bucket two: 6-10 years, and bucket three: 11+ years.  

While this strategy does protect against market volatility and leaves room for growth, it can also be time-consuming and may not align with your lifestyle and goals. 

5. Dynamic withdrawals 

How much you withdraw annually is based on the performance of your retirement funds. You will withdraw more in the years when your returns are high and less when they’re low. 

Like the bucket strategy, dynamic withdrawals protect against market volatility, but it does not provide a fixed annual income and makes planning more difficult. 

How will I be taxed on my retirement withdrawals? 

Regardless of how much you’ve saved during your years spent retirement planning, taxes can become one of your biggest expenses, so you must get a handle on them early.    

When it comes to your retirement savings, you must pay income tax on withdrawals from any tax-deferred investments in the year you take the money. Most retirement income can be subject to this, including pension payments, annuities, and distributions from IRA, 401(k) and 403(b) plans. 

It’s important to note quite a few states have zero state income tax, including retirement income. 

The following states levy no tax on your retirement income:   

  • Alaska – No state income tax.   

  • Florida – No state income tax.   

  • Illinois – No retirement income tax, including Social Security, pension, IRA, and 401(k).   

  • Iowa - Beginning in 2023, Iowa residents over 55 will not be taxed on their retirement income.    

  • Mississippi – No retirement income tax, including Social Security, pension, IRA, and 401(k).   

  • Nevada – No state income tax.   

  • Pennsylvania – No retirement income tax, including Social Security, pension, IRA, and 401(k).   

  • South Dakota – No state income tax.   

  • Tennessee – No state income tax.   

  • Texas – No state income tax.   

  • Washington – No state income tax.   

  • Wyoming – No state income tax.   

In contrast, the following 12 states will tax you on some or all of your Social Security benefits: Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, Rhode Island, Utah, Vermont, and West Virginia.   

How do I reduce tax when withdrawing from my retirement accounts? 

It’s also important to ensure your money isn’t eaten up by tax  when you start retirement fund withdrawals.  

There are just two ways you can avoid tax traps when withdrawing your money: 

  • Withdraw in the right order – if you retire with more than one retirement fund that includes a Roth IRA, starting  withdrawals from your Roth account and getting some tax-free money might be tempting. This, however, is ill-advised. Roth IRAs are not subject to an RMD. This means you can keep your money there for as long as you wish, giving it more time to grow. In contrast, withdrawals from your traditional 401(k) account will always be taxed, regardless of when you take it.  

  • Consider a Roth conversion – if you have a traditional 401(k) or IRA, you can roll these accounts into a Roth IRA. Of course, this will result in an initial tax bill. But once that is paid, your money will grow tax-free in its Roth account and become free from the pressures of RMDs.  

If you need help figuring out the best withdrawal strategy for you, it's important to seek expert advice. A good place to start is Unbiased. Here you can get matched with an independent SEC-regulated financial advisor who can ensure you’re getting the most out of your current plan and are on course to achieving your retirement goals.   

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Senior Content Writer

Rachel Carey

Rachel is a Senior Content Writer at Unbiased. She has nearly a decade of experience writing and producing content across a range of different sectors.