The U.S. is seeing a record 4.2 million Americans stepping into retirement in 2025, making it more important than ever to have a solid withdrawal strategy in place. While financial experts suggest a comfortable retirement requires $50,000 to $70,000 per year for individuals and $80,000+ for couples, the amount needed depends largely on your location and lifestyle. Retirement income can vary widely. Retirement income estimates for 2024-2025 suggest that retirees fall into three broad income categories. The first are low-income retirees who rely primarily on Social Security benefits and earn less than $30,000 per year. Then come the middle-income retirees who have a mix of Social Security, pensions, and savings, earning between $30,000 and $70,000 per year. Lastly, high-income retirees bring in $70,000+ per year from 401(k) accounts, investments, and multiple income streams. But saving for retirement is only part of the equation. To ensure a foolproof retirement plan, you also need to know how much to withdraw from your investments each year so that your savings last for life.
A financial advisor can help you create a well-planned withdrawal strategy to avoid financial shortfalls in retirement. This article will also explore the importance of having a retirement withdrawal plan.
What is retirement plan withdrawal, and why is it important?
A retirement withdrawal plan outlines how much you need to withdraw from your investments during retirement to ensure your savings last a lifetime, fight inflation, and are not wasted away in taxes.
Here’s why it is important:
1. It eliminates the risk of running out of money
Unfortunately, many retirees lack a clear withdrawal strategy. According to a survey, only 39% of retirees have a written retirement plan within the first five years of retirement. The rest are relying on estimation when it comes to spending their savings. Without a proper plan, you can use up your funds too quickly and face severe consequences later. You may have to depend on family members, make drastic lifestyle changes, and struggle to afford essential expenses like healthcare and long-term care. No one wants to reach their older retirement years with financial uncertainty, but this is a real possibility if you do not manage your withdrawals wisely.
A well-thought-out withdrawal plan considers factors such as your age, life expectancy, and spending habits to arrive at a suitable monthly income that can sustain you for life. For example, if you retire at 60, your financial planning must account for at least 30 years of expenses, if not more. With medical advancements, many retirees today live well into their 90s.
Ensuring that your savings last for three decades requires careful allocation of funds at each stage of life. In the early years of retirement, your expenses may be higher due to travel and an active social life. You may spend more during these years, and your withdrawal strategy must reflect these needs. As you progress into the mid-years of your retirement, your spending might shift toward maintaining a comfortable lifestyle along with occasional social engagements. The later years often bring increased healthcare costs and potential long-term care expenses, which may require lumpsum funds. A withdrawal plan that accounts for these factors can help you maintain financial security and liquidity throughout your retirement.
2. It ensures tax efficiency and helps avoid penalties
A well-planned retirement withdrawal strategy is essential to ensure tax efficiency and compliance with rules.
According to the Federal Reserve’s 2022 Survey of Consumer Finances, 54.4% of families have some form of retirement account. Retirement accounts like the 401(k) and IRA can provide financial security, but they also bring tax obligations that must be managed carefully. Many retirees hold the bulk of their savings in tax-deferred accounts such as 401(k)s and traditional Individual Retirement Accounts (IRAs). Contributions to these accounts reduce taxable income during your working years, but withdrawals in retirement are taxed as ordinary income. Large balances in these accounts can lead to substantial tax bills, especially when Required Minimum Distributions (RMDs) begin at age 73. RMDs force you to withdraw a set percentage each year, even if you do not need the money. This potentially pushes you into a higher tax bracket. A withdrawal strategy can help you devise a plan that keeps your overall tax liabilities under control.
A withdrawal strategy also ensures that you follow the rules governing retirement account distributions. For example, traditional retirement accounts require you to start taking RMDs once you reach a certain age. If you fail to withdraw the required amount, you could face a penalty on the amount you should have taken. On the other hand, withdrawing too early, before age 59.5, can also trigger a 10% early withdrawal penalty, in addition to regular income taxes.
A withdrawal strategy ensures that you take the right amount at the right time to minimize penalties and optimize tax efficiency. You can speak to a financial advisor or use a tax-efficient retirement withdrawal planning calculator to understand your tax obligations and select an appropriate withdrawal amount each year to keep your taxes under check while adhering to the rules.
3. It helps you plan your Social Security withdrawals
Social Security plays a crucial role in retirement income, but your benefits are reduced if you continue to work in your golden years. This is why you must know how to plan your retirement withdrawal strategy with respect to Social Security to ensure you do not unintentionally end up reducing your income.
A survey in 2020 found that 27% of adults considered themselves retired, even though some were still working in some capacity. This is important because earning an income while receiving Social Security can temporarily lower benefits. The Social Security Administration (SSA) reduces benefits for individuals who claim early and continue working. Your benefits can be impacted by different types of income, like wages, bonuses, commissions, net self-employment income, and vacation pay. For those under full retirement age, $1 is deducted from benefit payments for every $2 earned above the annual limit. In 2025, this earnings limit is set at $23,400. If you reach the full retirement age in 2025, in the months leading up to full retirement age, $1 is deducted from benefits for every $3 earned above $62,160. However, once you reach the full retirement age, there is no earnings limit, and benefits are paid in full, regardless of your income.
A well-planned withdrawal strategy takes all this into account. If you continue working in retirement, you may choose to delay claiming Social Security to avoid these reductions. This will also help you increase your eventual monthly benefits. Moreover, you can withdraw from other retirement accounts like the 401k or IRA if you need money before reaching the full retirement age. Pensions, investment income, annuities, veterans’ benefits, interest income, and other government or military retirement benefits do not impact Social Security payments.
Planning your withdrawal strategy in advance can help you select the best course of action for your needs that fits into your broader financial picture.
SPONSOREDWISERADVISOR
Need a financial advisor? Compare vetted advisors matched to your specific requirements.
Choosing the right financial advisor is daunting, especially when there are thousands of financial advisors near you. We make it easy by matching you to vetted advisors that meet your unique needs. Matched advisors are all registered with FINRA/SEC. Click to compare vetted advisors now.
4. It helps you live the same life by mimicking your salary
With the right retirement withdrawal plan, you can ensure a steady income that feels just like your paycheck did before you retired. You can set up a system that allows you to keep living the life you are used to without unnecessary financial stress in retirement. Your income before retirement covered your daily expenses, utility bills, hobbies, travel, and more. Just because you are no longer working does not mean those expenses will suddenly disappear. In fact, some, like healthcare and travel, may even increase. Financial experts suggest aiming to replace approximately 80% of your pre-retirement income to maintain the same quality of life. So, if you earned $200,000 per year, you would ideally need about $160,000 annually in retirement.
Having a withdrawal plan in retirement allows you to structure your distributions to mimic your paycheck. You can set up automatic withdrawals from your 401(k), IRA, or pension account so that you get a predictable amount every month. You can also structure the liquidation of your stocks and bonds in a way that gives you the income you need at the right time while also considering market conditions. So, when the stock market is doing well, you can sell stocks for income and rely more on bonds to cover your needs when it is down.
5. It helps fight inflation
Your withdrawal rate does not only depend on your spending and needs. It also depends on inflation. A retirement withdrawal plan helps you fight inflation. Inflation gradually reduces the purchasing power of your savings, making it harder to cover your expenses as the years go by. Without a strategy that accounts for inflation, you may find yourself withdrawing more in the earlier years of retirement just to cover basic costs, which can shorten the lifespan of your savings.
A withdrawal plan helps you adjust your distributions over time so that your lifestyle is not affected by rising prices. For example, if you need 80% of your pre-retirement income, i.e., $160,000 per year, to maintain your lifestyle today, that same amount may not be enough 20 years from now if inflation continues to rise. A structured withdrawal strategy ensures that your annual distributions increase gradually to keep pace with inflation. At the same time, it also ensures that your savings do not exhaust too quickly. A withdrawal plan also helps ensure that your investments continue to outpace inflation. It allows you to focus on financial growth. For instance, investing in options like dividend-paying stocks, real estate, or Treasury Inflation-Protected Securities (TIPS) can help your portfolio generate inflation-resistant returns. This ensures your money retains its value in the years to come.
6. It offers peace of mind
With a proper strategy, you can withdraw from your retirement plans without constantly worrying about running out of money. Managing your retirement funds can feel overwhelming because, for the first time in your life, you are solely responsible for ensuring your money lasts. There are no paychecks coming in, and every withdrawal decision is yours to make. Hence, having a withdrawal plan before you step into retirement is highly advised.
Without a retirement withdrawal strategy, you may find yourself drawing too much too soon, which can leave you financially vulnerable in later years. On the other hand, if you withdraw too little, you may be forced to compromise on your lifestyle, which can prevent you from fully enjoying the retirement you worked so hard to achieve. Both these scenarios can lead to financial stress and anxiety, which is why striking the right balance is essential, and that balance can only be achieved through proper planning.
A structured withdrawal plan provides you with clarity and control over your finances. It helps you understand how much you can afford to withdraw from your investments each year. It also ensures that your monthly retirement income aligns with your savings, expected lifespan, and financial goals, as well as external factors like inflation and taxes. It gives you a clear picture of where you stand financially, rather than relying on rough estimates that may or may not be accurate.
To conclude
Stepping into retirement without a withdrawal strategy can put your financial future at risk and create unnecessary confusion. You may struggle with managing your savings in the face of inflation or face unexpected tax penalties. Therefore, it is essential to create a withdrawal plan that aligns with the different stages of retirement. You must also revisit your withdrawal plan periodically, as your needs, expenses, and market conditions are likely to change over time. Adjusting your withdrawal strategy can ensure that your finances remain secure and aligned with your requirements.
Use the free advisor match tool to get matched with experienced financial advisors who can help you develop a tax-efficient and well-balanced withdrawal strategy that offers peace of mind as you enjoy your golden years. Answer a few simple questions and get matched with 2 to 3 vetted financial advisors based on your requirements.