After years of saving and planning, your retirement is finally here. But while many people focus on building their nest egg, far fewer folks spend time thinking about how they will withdraw their money once they stop working. The way you take money from your retirement accounts can have a major impact on how long your savings last. Even retirees with substantial portfolios can run into financial challenges if they make costly withdrawal mistakes early on. The good news is that many of the most common retirement withdrawal mistakes may be avoided with a little planning and guidance.
Here are 4 retirement withdrawal mistakes and ways to help avoid them:
1. Withdrawing Too Much Too Soon
One of the biggest mistakes retirees make is spending too much during the first few years of retirement. It’s natural to want to travel, tackle home projects, or enjoy hobbies you had put off during your working years. However, withdrawing large amounts from your retirement accounts early can put unnecessary pressure on your retirement portfolio.
For example, imagine two retirees who each have $500,000 saved for retirement. One withdraws about $20,000 per year, while the other takes out $35,000 per year. At first, the difference may not seem dramatic. But over the course of 20 or 30 years, those larger withdrawals can add up quickly and put much more strain on a retirement portfolio, especially during years when the market is down.
Retire Wise Tip: Creating a realistic retirement spending plan can help you balance enjoying retirement today while also helping to protect your financial security well into retirement.
2. Ignoring Taxes
Many retirees are surprised to learn that not all retirement income is taxed the same way. Withdrawals from traditional IRAs and 401(k)s are generally taxed like regular income. Social Security benefits may also be partially taxable depending on your income. On the other hand, Roth IRA withdrawals are typically tax-free if certain requirements are met.
If you ignore or fail to plan for taxes, it can lead to larger tax bills than expected and may even reduce the amount of money you have available for spending. A thoughtful withdrawal strategy can help you manage taxes over time. For example, drawing income from a combination of taxable, tax-deferred, and tax-free accounts can help retirees control their tax bracket and potentially keep more of their money.
3. Letting Emotions Drive Decisions
Market downturns can be stressful, especially when you’re living off your investments. Some retirees react by pulling large amounts of money from the market during periods of uncertainty or moving everything into cash if they’re worried about stocks in decline. While these decisions may feel safer in the moment, they can potentially cause harm to long-term portfolio growth. It’s important to remember that retirement planning isn’t just about numbers; it’s also about managing your emotions during fluctuating market conditions.
Retire Wise Tip: Having a written withdrawal strategy in place helps you avoid emotional decision-making and keeps you focused on your long-term goals.
4. Not Having a Withdrawal Strategy
Some retirees simply withdraw money as needed without a long-term plan. While this may work temporarily, it can end up creating bigger problems over time. Taking withdrawals randomly from different accounts can lead to higher taxes, missed opportunities, and increased stress when markets become volatile. Instead, it’s important to develop a withdrawal strategy that aligns with your goals, income needs, and tax situation.
Here are a few questions to consider:
- Which accounts should be tapped first?
- How much income do you need each year?
- How will withdrawals change if the market declines?
- How will required minimum distributions (RMDs) affect your plan later?
Retire Wise Tip: Having answers to these questions can help give you more confidence and consistency throughout retirement.
Retirement Income Planning Matters
Saving for retirement is only half the journey. It’s just as important to create a strategy for turning those savings into income you can rely on throughout your retirement. And avoiding these common withdrawal mistakes can help your money last longer, giving you greater confidence during retirement. At Retire Wise, we help individuals and families develop personalized retirement income strategies designed to support their goals and lifestyle. If you’re approaching retirement or already retired, we can help you develop a thoughtful withdrawal plan designed to support your long-term financial confidence.
Investment advisory products and services made available through AE Wealth Management, LLC (AEWM), a Registered Investment Adviser. Neither the firm nor its agents or representatives may give tax or legal advice. Individuals should consult with a qualified professional for guidance before making any purchasing decisions. Investing involves risk, including the potential loss of principal.4240477 – 07/26
