Part of the challenge of saving for retirement doesn't just end with the creation of a retirement fund. A recent survey reveals that nearly 49% of American retirees do not have a formal withdrawal strategy, suggesting a potentially troubling future. This data was gathered by the fintech company IRALOGIX, highlighting the gap in retirees' financial preparedness.
There is a pitfall in many retirees’ approach to withdrawal. Most seem to prefer a decision-making process that is more attuned to immediate needs, while ignoring the importance of sustainable withdrawal rates and long-term potential market fluctuations, according to Peter J. de Silva, CEO at IRALOGIX. This could spell significant financial problems in the years to come.
While every individual's situation is unique, financial experts suggest various strategies including the 4% Rule, bucketing approach, and guardrails strategy as tools to help in developing systematic money-withdrawal plans during retirement.
MaryAnne Gucciardi, a certified financial planner (CFP) at Wealthmind Financial Planning, emphasizes on the value of a formal strategy. It imparts structure, clarity, and comfort as clients maneuver through their retirement period. According to her, the widely accepted 4% rule can serve as a solid start. It proposes a 4% withdrawal from a balanced 60/40 portfolio during the first year, followed by consistent yearly inflation-adjustment.
But Gucciardi underscores the necessity of a multifaceted strategy. Adding components like taxes, longevity, and market performance should be part of a comprehensive retirement withdrawal plan.
Another CFP and Managing Director at Spohn Partners, Nathan Spohn, forms financial plans for his clients a few years before retirement, focusing on a tax-efficient strategy for estate disbursement, such as from 401(k)s and Roth IRAs.
In addition, Spohn is an advocate for the 'guardrails' approach. It allows retirees to adapt their withdrawal rates, permitting increases during bull markets while necessitating reductions amidst bear markets. Spohn suggests, "A 3% withdrawal rate should be the foundation of planning before age 65."
For those fearful of market volatility affecting their retirement portfolios, experts propose the 'bucketing' approach. This strategy involves keeping a cash cushion covering at least a year's expenses to reduce the possibility of having to dispose of investments due to market downward trends. This approach creates three 'buckets': a short-term bucket for immediate expenses, a medium-term one for refilling the first and a long-term one specifically for future needs and inflation protection.