Here's What Happens When You Don't Establish an IRA Withdrawal Strategy

If you’re heading into retirement with a healthy IRA balance, you’re in great shape. Many people, unfortunately, are forced to kick off retirement with no savings at all and live on Social Security income alone, which doesn’t tend to be all that generous. So if you managed to save and invest money well throughout your career, you may be approaching retirement with hundreds of thousands of dollars to your name — or more.

But one thing you don’t want to do is mismanage the savings you’ve amassed. And if you don’t take the time to establish an IRA withdrawal strategy, you might sorely regret it down the line.

When you put yourself at risk of running out of savings

In a recent Northwestern Mutual survey, 43% of respondents said they were worried about outliving their savings. But one thing you should know is that it doesn’t matter if you’re starting retirement with $100,000 in savings or $1 million. You run the risk of depleting your nest egg in your lifetime regardless of your starting balance if you don’t manage your funds wisely.

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To that end, it’s really important to establish a withdrawal strategy early on. If you don’t and instead just pull money out of your IRA whenever you want, you might eventually whittle your balance down to $0. And if you do that, you might then be forced to live only on Social Security. The average monthly benefit the program is paying right now is $1,848. Does that sound like enough to live on? Probably not.

Granted, benefits are subject to cost-of-living adjustments over time. The point, however, is that you generally don’t want to be forced to live on Social Security alone. If you run out of savings during retirement, that might happen. And from there, you might have to seriously cut your spending at a time in life when you really don’t want to do that.

What’s the right withdrawal rate for you?

For years, financial experts swore by the 4% rule in the context of retirement plan withdrawals. The rule had you starting out with a 4% withdrawal rate your first year of retirement and adjusting subsequent withdrawals for inflation.

But that rule was established at a time when bonds were paying more generously and life expectancies weren’t as long. These days, people are, thankfully, living longer, which means they need their savings to last longer. But because bonds aren’t paying the same amount of interest they were decades ago, and bonds are a common retirement investment, a 4% withdrawal rate could end up being too aggressive.

If you don’t want to run the risk of depleting your nest egg, you may want to stick to an annual withdrawal rate of 2.5% to 3%. It’s a good idea to sit down with a financial advisor to land on a more targeted rate for you, though. An advisor can look at your assets, expenses, and other factors to help you come up with a good number.

It’s great to have a lot of savings going into retirement. But make a point to withdraw from your savings mindfully so the money you’ve worked so hard to accumulate doesn’t run out.

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