When it comes to retirement, one of the most common questions people ask is: How much can I safely withdraw without running out of money? That question sits at the heart of retirement planning—and the answer is different for everyone. A sustainable withdrawal strategy for retirement isn’t a one-size-fits-all formula. It’s a thoughtful, dynamic approach to drawing income in a way that supports your lifestyle, reflects your priorities, and aligns with the realities of market fluctuations and longevity.
A well-constructed withdrawal strategy should be built with flexibility in mind. Retirement is not static—nor is the economy. That’s why the right strategy needs to consider multiple variables including age, risk tolerance, risk capacity, investment mix, spending goals, and potential healthcare costs, to name a few.
Why Having a Sustainable Withdrawal Strategy Matters
Without a withdrawal strategy, retirees often either spend too much too soon or become overly conservative, potentially limiting their lifestyle unnecessarily. A sustainable withdrawal strategy for retirement is designed to help you pace your withdrawals in a way that aligns with your long-term financial plan.
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What’s at stake? Quite a bit. Retirees today face longer lifespans, evolving economic conditions, and unpredictable expenses. That’s why your withdrawal strategy needs to do more than follow a rule of thumb—it should be tailored to your unique financial picture.
Key Considerations for Building a Sustainable Strategy
Here are a few core elements to review when building or revisiting your withdrawal approach:
- Withdrawal Rate
One of the first decisions is how much to withdraw each year. Wall Street’s commonly referenced 4% rule suggests withdrawing 4% of your retirement portfolio annually, but this may not be suitable for every retiree. It doesn’t account for inflation, market cycles, or unexpected expenses. This suggested rule is also based on a passive investment management strategy most Wall Street firms recommend today. A more customized approach looks at your overall asset mix, expected longevity, and lifestyle goals to determine a withdrawal rate that’s flexible and sustainable over the long term. At Davidson Capital Management our actively managed, tactically balanced management philosophy has proven for over 30 years a 5% withdrawal rate has been achieved without deteriorating the original invested principal. - Income Sources
Retirement income may come from a combination of Social Security, pensions, retirement accounts (such as IRAs and 401(k)s), brokerage accounts, and rental incomes. Each source may have different tax implications, timing requirements, and rules for distributions. Although complicated, coordinating how and when to tap into each stream can help reduce unnecessary taxes and potentially extend the longevity of your portfolio. The order of withdrawals matters, and strategic sequencing can make a noticeable difference. - Tax Efficiency
Withdrawals from tax-deferred accounts like traditional IRAs are taxed as ordinary income, while withdrawals from Roth IRAs are typically tax-free. Taxable brokerage accounts may trigger realized capital gains taxes. Managing which accounts to draw from—and in what order—can help reduce your tax liability over time. For example, in some cases it might make sense to draw from taxable accounts first to allow tax-deferred savings to continue compounding tax deferred. A sustainable withdrawal strategy should incorporate tax-aware planning to help preserve more of your income. - Market Performance
Markets will fluctuate, and retirement could last 20 to 30 years or more. During down markets, withdrawing too much from your portfolio can accelerate depletion—especially early in retirement. This is known as “sequence of returns risk.” One way to navigate this risk is to build a strategy that includes a flexible withdrawal plan—such as temporarily adjusting spending or drawing from more conservative allocations during downturns. A diversified portfolio and a well-structured income plan can help manage this challenge more effectively. We also recommend avoiding portfolio “chunking” or taking a significant amount of money from your investments all at once. While we understand unforeseen expenses can come out of nowhere, it’s important to have a conversation with your advisor prior to making this decision. Chunking combined with a down trend in the market can cause significant long-term damage.
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- Inflation Impact
Inflation slowly reduces your purchasing power over time. Even modest inflation can have a major impact on retirement income over the course of two or three decades. For example, an expense that costs $50,000 today could cost over $80,000 in 20 years with 2.5% annual inflation. Your withdrawal strategy should anticipate rising costs, especially in categories like healthcare, housing, and travel. Incorporating assets with inflation-responsive potential, like equities is critical in retirement.
Building an Income Strategy that Evolves with You
A sustainable withdrawal strategy for retirement is a critical part of transitioning from the accumulation phase to the distribution phase of your financial life. This shift involves more than numbers—it often requires a new mindset and a clear understanding of how each decision affects your financial picture over time.
Everyone’s path through retirement is different. That’s why working with an experienced advisory team with over three decades of a proven withdrawal strategy will make a meaningful difference.
Ready to Review Your Withdrawal Strategy?
Whether you’re approaching retirement or already in it, reviewing your withdrawal strategy regularly is a smart step. Your financial plan should evolve with your life—and your income approach should support that evolution.
If you’re ready to talk through your options, schedule a consultation today and take the next step toward building a retirement income strategy that fits your goals.
