Managing your savings during retirement can be a juggling act. On the one hand, you need to generate reliable income for your needs today. At the same time, you need to consider long-term strategies to help grow your money so you'll still have enough to last you 10, 20 or even 30 years. And of course, no investment is guaranteed to grow and can instead lose value — yet another factor to consider.
Fortunately, there are several retirement withdrawal strategies to help balance these different challenges. We've covered three of the most popular here. Remember, though: The right solution for your needs will depend on your financial situation and overall goals.
1. Bucketing Strategy
In a bucketing strategy, you divide up your savings into multiple different categories. For example, you could have a spending bucket, a short-term bucket and a long-term bucket:
- When you need money to spend, you take it out of your spending bucket. You could put enough for about three years of expenses and keep this money in cash or a type of lower-risk account that allows you to access the funds at any time.
- The money in the short-term bucket is likely money you plan on accessing over the next decade. The idea is that you move it to your spending bucket once you get through your original spending funds. The short-term investments could go into assets with relatively high safety and growth.
- The long-term bucket is for investing for the later stage of retirement, or more than 10 years into the future. This money could go into assets like stocks and mutual funds, which tend to be riskier. But while their value is more likely to fluctuate, it could have a higher return in the long run.
A bucketing strategy can help you manage the emotional swings of investing during retirement. For example, if the stock market goes down, it may feel less urgent because you aren't using the money in the long-term bucket for at least 10 years. You'll only be taking money out of your spending bucket, which is based in cash and thus doesn't lose value in the same way as the stock market.
Bucketing also lets you focus on specific goals for each category. With your long-term bucket, you can focus on generating high long-term growth and not spending anything. With your spending bucket, on the other hand, you can focus on budgeting the money you need from day to day.
2. Systematic Withdrawals
In a systematic retirement withdrawal approach, you create a diversified portfolio with a mix of long-term investments, medium-term investments, and guaranteed assets. Just keep in mind that diversification cannot guarantee a return or protect against a loss. You (and, ideally, your registered representative) calculate how much of your portfolio should be in each category, and if market performance changes the balance, you can then rebalance by redistributing funds within the portfolio.
For example, if the stock market goes up so you end up with too much in stocks, you could sell some shares at a gain and pay the earnings into the other categories.
As part of these retirement withdrawal strategies, you pick a set percentage of your portfolio that you'll take out for spending, like 4 percent per year. That would come equally from all parts of your portfolio, meaning you'd spend down 4 percent of your stocks, 4 percent of your bonds, 4 percent of your cash and so on each year.
A systematic retirement withdrawal plan requires that you constantly reevaluate the performance and balance of your portfolio. If your savings are decreasing faster than expected, it can be easier to catch with a systematic approach, because you're spending a fixed percentage of your entire portfolio. This can help lead you to automatically adjust and spend less.
However, maintaining a systematic withdrawal strategy can be more stressful during market downturns. Because all your savings are in one portfolio, you could see the portfolio's entire value drop. You'll also likely have to sell some stocks during a downturn (and therefore at a loss), since you'll be taking money out of every asset class.
3. Lifetime Income Through Annuities
One other popular approach is to put some of your retirement savings into an immediate annuity. An immediate annuity could be a good fit for you if you're looking to help secure your income and standard of living after you stop working. In exchange for a lump sum payment, an insurance company can set up a series of future regular payments. These payments can be guaranteed for a set amount of time or for the rest of your life. If you opt for a joint and survivor annuity, payments can be guaranteed for the rest of a designated survivor's life.
Another advantage of a fixed immediate annuity is that your monthly payments stay the same even during market downturns. Likewise, annuity payments do not increase when the market does well. Your retirement income from that annuity stays the same in good times as well as bad. Also, payments are guaranteed by the insurer that sets up your contract.
There's no perfect retirement withdrawal strategy. You could likely use any of these approaches effectively, or even combine them. The key is to have some sort of plan to help make your money last throughout all your retirement age milestones.