Approaching Retirement? How to Withdraw Your Savings Effectively

Louise A. Chauncey, Portfolio Manager, First Republic Investment Management

July 14, 2015

People spend so much of their lives focused on building up savings that they may feel perplexed when it’s time to actually withdraw and spend it. However, it’s not that difficult a process.

By running some numbers with your financial advisor and taking basic steps to simplify the process, you can create a drawdown strategy that works for you. Below are some key steps to make sure your savings will last throughout your lifetime:

Determine the right withdrawal rate

The most challenging question for many retirees is how much they can safely withdraw from their retirement accounts each year. A common rule of thumb is that retirees can withdraw 4% of their savings annually. However, that withdrawal strategy can be risky: If the stock market experiences an extended downturn or your investments don’t perform as well as expected, a 4% annual withdrawal rate could deplete your savings faster than expected. This is especially true if the downturn occurs early in your retirement.

Instead, work with your financial advisor to consider various scenarios and do some personalized forecasting. Your advisor can show you how your savings and investments would perform under various circumstances and withdrawal rates. Some retirees, for example, tie their annual withdrawal rate to how their portfolio performs each year or they withdraw a certain dollar amount or percentage each year. Everyone has different goals, expenses and risk tolerances, so it’s important to personalize your withdrawal strategy to your unique situation.

Keep your savings in as few places as possible

Having your savings scattered between multiple accounts and financial institutions makes the drawdown process more complicated because it will be harder to keep track of your investments and the tax and reporting requirements. Consider rolling your savings into as few accounts and institutions as possible. Of course, you will have to keep certain types of savings, such as your traditional tax-deferred IRA savings, separate from any after-tax Roth IRA savings. If you have any outstanding 401(k) plans or multiple traditional IRAs, you may want to consider rolling them into one account.

Focus on tax efficiency

It usually makes sense to withdraw from your taxable savings first, in order to keep your tax-advantaged savings—such as your traditional or Roth IRA—growing as long as possible. However, you will have to start making required minimum distributions (RMDs) from your tax-deferred accounts once you reach age 70 ½, and there can be other reasons to withdraw from multiple types of accounts simultaneously depending on your unique financial situation. Your financial advisor can evaluate your various types of accounts and help you find a drawdown strategy that minimizes your tax consequences.

Stay focused on growth

Just because you are retired doesn’t mean you should stop focusing on investing and growing your wealth. Retirement today can be a long and fruitful life stage, and most retirees will want to keep a healthy exposure to stocks and bonds in order to ensure their portfolio’s value continues to outpace inflation. Many people also hope to leave behind a financial legacy for family and future generations.

Review your opportunities annually

Your expenses, goals and needs can change over the course of retirement, so it’s important to make sure you continually evaluate your drawdown strategy to ensure it’s still meeting your needs.

A First Republic investment professional can work with you to help you develop a drawdown strategy that meets your specific needs and goals, as well as determine the best asset allocation based on your risk tolerance and long-term objectives.

©First Republic Investment Management, 2015