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Retirement withdrawal strategy: how to turn savings into a paycheck.
There is no single best retirement withdrawal strategy. The right one depends on how much income you need, how your accounts are taxed, when you retire and how much market risk you can live with. Each approach trades predictability against flexibility, and none removes market risk or guarantees that your money will last.
The shift
Why taking money out is different from putting it in
While you save, a market drop is uncomfortable but often survivable, because you are still adding money and have years to recover. Once you start withdrawing, every sale in a down market takes shares out of the portfolio that are no longer there when prices recover.
Withdrawals also have to do more than one job. They need to cover spending that changes over time, account for taxes, and last for a horizon nobody knows in advance. That is why a single percentage rarely answers the whole question, and why the strategy matters as much as the amount.
The main approaches
Three common ways to draw income
| Approach | How it works | Where it may help | Where it may fall short |
|---|---|---|---|
| Fixed percentage rules | Withdraw a set percentage of the starting balance in the first year, then adjust that dollar amount for inflation each year. | Simple to understand and easy to plan around, because the income amount is known in advance. | It assumes steady spending and a fixed time horizon, and it keeps taking the same amount whatever markets do. It does not say which years the poor returns land in. |
| Flexible spending guardrails | Start with a withdrawal rate, then raise or trim spending when the portfolio moves past limits set in advance. | Lets spending respond to markets, which may make a plan more durable than a rigid rule. | Income can fall in a downturn, which only works if your budget has room to flex. It also needs someone to apply the rules consistently. |
| Time-segmented income | Divide savings into consecutive periods and invest each by when it will be spent, with near-term income held in steadier assets. | Next year's income is already set aside, which may make it easier to stay with the plan in a downturn. | It does not remove market risk, later segments can still lose value, and refilling the segments takes discipline and has tax consequences. |
Timing
Why the order of returns matters
Two retirees can take the same withdrawals from portfolios with the same average return and still finish in very different places, because of which years the poor returns arrive. Early losses combined with ongoing withdrawals can do lasting damage that later gains may not repair. This is called sequence-of-returns risk.
A withdrawal strategy cannot control the order of returns. What it can change is how much you are forced to sell when markets are down. To see why average returns can mislead once you are withdrawing, read The volatility tax. Any approach still leaves you exposed to market risk, and selling less in a downturn does not mean losing nothing.
Taxes
Which accounts you draw from may affect your taxes
- Taxable accounts
- Selling investments in a taxable account may trigger capital gains, and the tax depends on how long you held them and on your other income that year.
- Pre-tax accounts
- Withdrawals from traditional retirement accounts are generally taxed as ordinary income, and required minimum distributions may start at a set age whether or not you need the money.
- Roth accounts
- Qualified withdrawals from Roth accounts are generally not taxed, which may make them useful for flexibility, but money left in a Roth account is also money you cannot use to fill a lower-tax year elsewhere.
Spreading withdrawals across account types in a planned way may help manage how much income is taxed in any one year. The limit is that tax rules change, one year's choice can affect the next, and the order that looks best today may not stay best. A tax professional should look at your situation.
Our approach
Where the Next Phase Plan fits
We build it around the gap between what you want to spend and what Social Security or a pension already covers, and we plan the refilling deliberately rather than at whatever price the market offers. It is meant to reduce the chance that a poor market early in retirement forces you to sell at a loss.
The limits are real. A segmented plan does not stop markets from falling, later segments can still lose value, and research is mixed on whether it produces more money than a single diversified portfolio. What it mainly changes is when you sell. Whether it suits you depends on your own circumstances.
This page is educational and is not personalized advice. Every strategy involves risk, including the potential loss of principal. Whether a withdrawal approach is appropriate depends on your own circumstances, and tax treatment depends on your situation.
Questions
Common questions
There is no single best strategy. Fixed percentage rules, flexible guardrails and time-segmented income each trade predictability against flexibility. The right fit depends on your income needs, taxes, timing and risk tolerance, and none of them removes market risk or guarantees that your money will last.
It depends on your circumstances. Taxable, pre-tax and Roth accounts are taxed differently, so the order you draw from them may change your tax bill in a given year. Required distributions and your other income also matter. A tax professional should review your situation before you decide.
It can be a reasonable starting sanity check, but it is a guideline from historical research, not a plan. It assumes fixed spending, a fixed allocation and a set horizon, and it says nothing about when poor returns arrive. Real retirements rarely follow those assumptions.
A calculator can give a rough sense of direction, but its answer is only as good as its inputs. Assumed returns, inflation, spending and time horizon all change the result, and it cannot predict the order of returns. Treat the output as one input to a plan, not a promise.
A fixed percentage takes income from one blended portfolio. Time segmentation divides savings by when the money will be spent, so near-term income comes from steadier holdings. It changes when you may need to sell, not whether markets can fall, and it still depends on refilling the segments over time.
Want to see how this would work for your numbers?
That is what the first conversation is. Thirty minutes to see where your income could come from, and whether a segmented plan fits. If we are not the right fit, we will tell you.