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After decades of saving and investing for retirement, your goal of becoming work optional is within sight.
- You’ve done a deep dive into your living expenses.
- You’ve considered how they might change as you grow older.
- But you don’t feel confident about how you’ll make your money last.
You need a portfolio withdrawal strategy for retirement. But how do you create one?
After all, you don’t know:
- How long you’ll live.
- How your investments will perform.
- What the inflation rate will be.
- How politicians will change the tax code.
You also likely have different sources of retirement income with different tax implications.
To manage these uncertainties, it’s helpful to set up a process based on what you know now, then tweak it as things change. Before you start to withdraw your invested retirement savings, consider these strategies for creating retirement income.
The 4 percent rule: A popular strategy
The 4 percent rule is an example of a safe withdrawal rate strategy — “safe” meaning that, when implemented correctly, it has a decent chance of making sure you don’t run out of money. And keep in mind that it isn’t really a rule so much as a guideline that can help retirees decide how much they should withdraw from their retirement funds each year.
You withdraw 4 percent of your portfolio’s value in year 1, then adjust that dollar amount for inflation each year thereafter.
- If your portfolio is worth $1 million, you’d take out $40,000 this year.
- If inflation is 3 percent, you’d withdraw $41,200 next year.
This methodology is why you’ll see the 4 percent rule also described as a “dollar-plus inflation strategy." The rule assumes a 30-year retirement and a moderate-risk portfolio of U.S. large-company stocks and five-year bonds. (Related: The 4 percent rule fully explained)
Smart people disagree on whether a 4 percent withdrawal rate is too high or too low, and the rate they suggest using instead changes over time. Even the rule’s creator, now-retired financial planner Bill Bengen, has changed his mind since publishing the rule in a 1994 issue of the Journal of Financial Planning. In May 2025, he told MarketWatch that 4.7 percent was the new 4 percent based on a more diversified portfolio and revised calculations that placed more emphasis on inflation rates than stock returns.
Some of the other limitations of the rule are:
- Retirement spending usually isn’t flat.
- It doesn’t account for taxes, investment fees, and the cost of health care in retirement.
- Your lifespan may be shorter or longer than 30 years.
- Your risk tolerance may be higher or lower than the model.
- Withdrawals that aren’t from a Roth or health savings account can have significant consequences (like higher Medicare premiums).
And while it’s been back-tested and proven to work over numerous historical 30-year periods, no one knows what future market returns will look like.
Variable withdrawal strategies
Let’s say that you don’t think your spending will be flat throughout retirement. Maybe you plan to travel extensively while you’re still young, and you want to be prepared for long-term care expenses when you’re older. You need a way to plan for irregular spending. You want flexibility within a framework that keeps you financially secure. It’s not the easiest thing to figure out on your own.
“Absolutely speak to a financial professional as early as possible,” said Jacqueline Wiggins, an estate and business planning attorney at MassMutual who has herself discussed withdrawal strategies for her own plan with her financial advisor. “A financial professional will clearly identify your financial resources, take the time to discuss and quantify your vision of retirement, and model different strategies to show how long your resources will potentially last under different withdrawal scenarios.” (Related: How to live off investment interest in retirement)
One framework for a variable or dynamic withdrawal strategy sets a ceiling and a floor. It starts by assuming you want to withdraw a fixed percentage of your portfolio. As in our earlier example, let’s say this amount is 4 percent, or $40,000.
- Your ceiling — the highest your withdrawals could get in future years — would be 20 percent higher than $40,000, or $48,000 (and you’d adjust that amount for inflation).
- Your floor would be 15 percent below $40,000, or $34,000 (also adjusted for inflation).
How close to the ceiling or floor your withdrawals could be each year would depend on market performance. You would be able to withdraw more when the market was doing well, but you would have to withdraw less when returns were poor.
Bucket strategy
While a flexible strategy might feel more realistic, it also entails more uncertainty. Uncertainty can work in your favor: Markets might do better than predicted. But what happens if they do worse?
Poor investment returns early in retirement can do lasting damage to your retirement portfolio. If you have to sell more shares in a down market — either to get the income you need to live on or because of required minimum distributions (RMDs) after you turn age 73 — then you have fewer shares to help your portfolio bounce back when the market recovers.
The younger you are, the worse your investment returns, the higher your investment fees, and the higher your withdrawal rate, the more sequence-of-returns risk threatens your long-term plan.
You can mitigate sequence-of-returns risk by using a bucket strategy. Think of it as a subcomponent of your overarching strategy. If you have enough money in low- and moderate-risk assets, you can withdraw the money you need for living expenses from those buckets when the market is down so your stocks have time to rebound.
The bucket strategy adds a time component that makes your asset allocation and portfolio rebalancing strategy more tangible. Instead of just thinking of your portfolio as 60 percent stocks, 30 percent bonds, and 10 percent cash, you think about when and how you will use those assets.
Money that you’ll need to withdraw in the next couple of years belongs in bucket 1 (cash). Bucket 2 (bonds) covers your mid-term needs, while bucket 3 (stocks) covers your long-term needs. If the market is down when it’s time to take a distribution, you can take it from your low-risk assets. You can sell from buckets 2 and 3 when the market is up, using that money to replenish buckets 1 and 2 if you’ve had to dip into them. (Related: Understanding the bucket approach to retirement)
Additionally, this strategy allows you to take advantage of tax diversification, managing retirement income by holding assets in various accounts with different tax treatments. (Related: Income tax diversification defined)
Systematic withdrawals
To make the bucket method work, you also need a strategy for selling your stocks and bonds. Do you sell a certain amount at the end of each year? Every month? Quarterly? When it feels right?
Academic research tells us that most of the time, a strategy that has historically maximized returns is to invest as much money as you can, as soon as you can. Markets generally go up, and you want as much time to capture those gains as possible.
Behavioral finance and the reality of people’s cash flows tells us that the next-best option is dollar-cost averaging. Automatically investing a little each month or each payday means you end up buying into the market at a variety of price levels. You don’t have to worry about whether the market will drop the day after you invest your lump sum and take too many years to recover.
The opposite can be true when you’re selling investments and taking distributions, according to a study on RMD strategies by Derek Horstmeyer, a George Mason University finance professor. You may be better off selling gradually, or dollar-cost averaging out, rather than selling in a lump sum. However, as your tax bracket increases, a better method can be a hybrid between taking out half of your RMD as a lump sum at the end of each year (to maximize time in the market) and dividing the other half into 12 equal monthly distributions (to smooth out volatility).
RMDs
Speaking of RMDs, these government-imposed distributions from your tax-deferred retirement accounts use another type of withdrawal strategy: one that’s based on your remaining life expectancy. With RMDs, you don’t get to choose what percentage of your portfolio you want to withdraw each year; the IRS has already decided for you.
The IRS doesn’t say you have to spend that money, of course: You can reinvest it in a regular brokerage account if you want. However, all your RMD distributions will be taxed as ordinary income, which means you need to plan carefully to avoid unintended consequences like high marginal tax rates and higher insurance premiums. (Related: Using annuities to satisfy your RMD obligations)
Roth conversions are a strategy for gaining more control over when you pay taxes on the money in these accounts. Choosing when to pay taxes can also help you control how much tax you pay.
Abby Eisenkraft, an IRS enrolled agent and the CEO of Choice Tax Solutions in New York City, said the best times for a Roth conversion can be:
● Years when your income is lower.
● Before increases in tax rates (if you expect rates to be higher in the future).
● Before moving to a high-income-tax state (or after moving to a no-income-tax state).
Once your money is in a Roth account, distributions aren’t considered income. Under current tax law, you can use Roth withdrawals to supplement your income without triggering higher Medicare premiums, lowering your Affordable Care Act subsidies for marketplace health insurance plans (if you retire before you qualify for Medicare), or triggering the 3.8 percent Net Investment Income Tax.
Conclusion
A sound portfolio withdrawal strategy isn’t as simple as taking money out as you need it. It considers taxes, investment returns, health, and what kind of life you want to live. Also, it’s not a one-time decision.
“A withdrawal strategy and its continuing impact should be viewed as a conversation,” Wiggins said. “First, you and your financial professional should determine a good review schedule. In addition, any time there is a major change in the economy, a major expense on the horizon that was not part of your plan, or a major financial decision that has to be made, it is a good idea to touch base with your financial professional and determine if any adjustments need to be made.”
With so many moving pieces, many people benefit from professional guidance: someone who can help them avoid impulsive decisions and consider how each move impacts their big picture. If you’d like to see how working with an experienced financial professional might be better than going it alone, get in touch with a MassMutual financial professional.
Discover more from MassMutual…
Financial protection tactics as you near retirement
What to do with your RMD? 5 possibilities
Mitigating the financial risks of a forced retirement
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