Worried about outliving your savings? How to plan your retirement withdrawal strategy in 4 smart steps

As you approach retirement, one of the most critical decisions you'll face is how to strategically withdraw from your hard-earned savings. It's not just about having enough money — it's about making these savings last throughout your golden years.

As you collect Social Security benefits, the order in which you tap into your various retirement accounts can significantly impact your tax burden and the longevity of your nest egg funds. There's no one-size-fits-all withdrawal order, but a general rule of thumb is to start with your required minimum distributions (RMDs) if you’re 73 or older — simply because they’re mandatory.

Next, withdraw from your taxable accounts at your brokerage or investment platform, which gives your tax-advantaged accounts more time to grow. After that, tap into your tax-deferred retirement accounts like traditional 401(k)s or IRAs. This leaves your Roth accounts last, letting them continue growing tax-free.

Read on to learn why this withdrawal strategy makes sense for many retirees and factors that can affect the order you follow.

In what order should you tap your retirement funds?

A simple yet wise strategy is to approach your retirement funds in an order that maximizes your money:

1. Take your required minimum distributions (RMDs)

2. Withdraw from your taxable accounts

3. Tap into your tax-deferred savings

4. Use your Roth accounts

1. Take the required minimum distributions (RMDs)

Once you reach age 73, you’re required by the Internal Revenue Service (IRS) to withdraw a specific dollar amount from most retirement accounts each year, including traditional 401(k)s and traditional IRAs. These are your required minimum distributions — or RMDs.

Planning to tap into your retirement accounts that require RMDs helps you dodge some hefty penalties. Fines range from 10% to 25% of the required distribution you didn’t take in time, which could really put a dent in your retirement funds. So, even if you don’t need the money, it’s smart to take out your RMDs to help your retirement savings last longer.

Keep in mind that the SECURE 2.0 Act, passed in 2022, brought several changes to RMDs. While the current RMD age is 73, it increases to 75 in 2033. This gives retirees more time for tax-deferred growth before mandatory withdrawals kick in.

2. Withdraw from your taxable accounts

If you’ve already taken care of your RMDs or you’re not yet 73, your next stop should be your taxable accounts. These are your accounts at brokerages or investment platforms you’ve used to invest in stocks, bonds, mutual funds and other assets.

Taxable accounts, such as individual or joint brokerage accounts, offer flexibility but don't offer retirement-related tax advantages:

• You invest with after-tax dollars, so you've already paid income tax on this money.

• You'll owe capital gains tax only on the profit you earn when you sell assets, not on your entire withdrawal.

• Long-term capital gains taxes on assets you held for more than a year are lower than taxes on short-term capital gains on assets you held less than a year.

So, try to cash out long-term assets first to take advantage of those lower long-term capital gains taxes. Plus, taxable accounts don't penalize withdrawals before you're 59 1/2, making them a great option to tap into if you plan to retire early.

Dig deeper: Tax breaks after 50 you might not know about

3. Tap into your tax-deferred savings

After taxable accounts, consider tapping into your tax-deferred savings in traditional 401(k) or traditional IRA accounts. These accounts allowed you to contribute pre-tax dollars, reducing your taxable income in the year you contributed. This gives your traditional retirement funds the following tax advantage:

• Your money in these traditional retirement accounts has grown tax-deferred, meaning you haven't paid taxes on it.

• You can tap into these accounts penalty-free once you’re 59 1/2 or older. Before that, you’ll face a 10% early withdrawal penalty.

• When you withdraw, you'll pay ordinary income tax on the entire amount you withdraw, including original contributions and growth earnings.

You can optimize your withdrawal rate by taking out just enough to maximize your current tax bracket without going into a higher one. This strategy is called bracket management, and it’s a smart way to stretch your retirement funds and minimize your tax burden.

But keep in mind that the IRS requires you to take out required minimum distributions (RMDs) once you’re 73 or older. So plan ahead for the impact your RMDs can have on your tax bracket.

Dig deeper: 401(k) withdrawal rules: What to know before cashing out — and how to avoid penalties

4. Use your Roth accounts

Finally, it’s time to tap into your Roth accounts, which includes Roth IRAs and Roth 401(k)s. The funds in these accounts are the cherry on top of your retirement savings, offering unique tax advantages:

• You’ve made contributions to your Roth accounts using after-tax money, so you've already paid taxes on this money.

• Both your contributions and earnings grow tax-free, meaning you won’t pay any additional taxes when you withdraw any Roth funds in retirement.

That’s why it’s best to leave these funds untouched as long as possible to let them grow without any tax burden, potentially giving you a larger nest egg down the road. Plus, if you end up not needing the money during your lifetime, you can leave your Roth accounts to your loved ones as a tax-free inheritance.

Remember that, unlike traditional retirement accounts, Roth IRAs don’t require minimum distributions during your lifetime. As of 2024, the same rule applies to Roth 401(k)s.

Dig deeper: Roth IRAs: What they are, how they work and how to open one

3 factors that can change your retirement fund withdrawal strategy

Your current and future tax brackets, retirement goals, market conditions and additional factors can all play a role in defining your best strategy for tapping into your retirement savings.

1. Your current and future tax brackets

Where you fall on the tax bracket ladder now and where you might be in the future can help shape your withdrawal strategy. This is especially true for withdrawals from taxable brokerage accounts, traditional 401(k)s and traditional IRAs since they increase your tax liability.

For example, if you expect to be in a higher tax bracket later, it might make sense to tap into these accounts now while your tax bracket is lower. On the other hand, if you think you’ll be in a lower tax bracket down the road, you might want to hold off on those withdrawals as long as they aren’t required.

2. Retirement goals

You might have a retirement dream in mind, from traveling the world to starting a garden to enjoying beautiful days with your grandchildren. Your retirement goals can shape your withdrawal strategy.

If you plan on buying an RV or a boat early in retirement, you might need to make bigger withdrawals early on. But if you’re aiming for a steady lifestyle, you could spread your withdrawals more evenly.

Then there’s the legacy you leave behind, which influences which accounts you tap first. For example, Roth accounts are a great vessel for passing on tax-free retirement assets to your loved ones, while traditional IRAs and 401(k)s are better used during your lifetime.

3. Market volatility

At least a portion of your retirement funds might be invested in the stock, bond or mutual fund market. This means that economic ups and downs can change the impact of each withdrawal you make.

For example, you might want to avoid making larger withdrawals during downturns to avoid selling assets at a low price. But you could feel more comfortable taking out more money when the market is riding high.

That’s why it helps to keep your eye on market conditions even after you retire to know when and where to draw your retirement income from.

Dig deeper: How to budget in retirement and maintain your finances on a fixed income

How much should you save for retirement?

How much you save for retirement depends on your needs when the time comes to retire. Consider your current expenses now and remember that, generally, many retirement experts suggest you’ll spend upward of 80% of your pre-retirement income when you retire.

If you’re unsure, use a calculator to see if you’ve saved enough or are on the right track to save enough before your eventual retirement. If not, adjust your savings plan to max out your IRA and, if possible, your employer-sponsored 401(k). While an employer match is nice, not everyone has that opportunity at work. Still, you should try to put as much as possible into your retirement accounts while you still can.

Remember that as you get closer to retiring, your retirement portfolio should be less risky. Consider safer investment options and assets in your strategy. If stocks made up most of your portfolio when you were in your 40s and 50s, you might drop that to 30% to 50% of your portfolio when you’re in retirement.

Markets shift and change constantly. Even if you’re taking money out of your retirement accounts in a down year, having safer asset allocation means you’ll lose less if the market takes a turn when you’re set to take distributions.

Dig deeper: How to invest your money after retirement — and make it last through your golden years

How much to withdraw during retirement: The 4% rule of thumb

Figuring out how much to take out during retirement isn’t always easy. The 4% rule was designed to help retirees make regular withdrawals without running out of money.

The 4% rule says to take out 4% of your tax-deferred accounts — like your 401(k) — in your first year of retirement. Then every year after that, you increase your retirement withdrawals by the previous year’s inflation rate.

Say you have $1 million in your accounts for retirement. In the first year of your retirement, you’d withdraw $40,000. If inflation were up 3% that year, you’d multiply that by the amount you took out the first year — $40,000 — and you get $1,200. That means in year 2, you’d withdraw $41,200. If inflation were up another 3%, you’d take out $42,436 in year 3. And you’d do this annually to calculate how much to withdraw every year.

While the 4% rule is more of a guideline and less of a stringent rule, it’s a good idea to use this as a way to measure how to make responsible withdrawals in retirement. You might need to work out your math differently based on your retirement income needs and how much you’ve saved — you might find that a 3% rule works just fine for you or you prefer to boost it to 6% to cover all your bases.

Dig deeper: The 4% rule for retirement: Is it time to rethink this popular withdrawal guideline?

Is a financial advisor worth it for retirement planning?

Yes, in most cases. An advisor is a financial professional who can help you manage your money as you plan for retirement, while giving you a sense of how much you can spend during retirement to make your savings last. Their market expertise may also help maximize your savings. If you’re anxious about retirement, the financial and investment advice of a professional can also give you peace of mind by assuring you that you’re on the right path. Start with our guide to finding a trusted retirement advisor.

Get matched with a financial advisor in 4 simple steps

FAQs: Tapping into retirement savings

How can I tell if my retirement nest egg is big enough?

Everyone’s retirement needs are different, so what you have in your account might be enough to cover all your needs. You’ll be able to tell if your retirement nest egg is big enough by calculating your expected retirement income and what your expected retirement spending is. If your income is higher than your expenses, you may have enough. But if you’re coming in the negative, you may still need to save more, earn more or find ways to cut expenses.

What is the 25x rule and 4% rule?

The 25x rule suggests saving 25 times your annual expenses to retire comfortably. It’s the inverse of the 4% rule, so you can use it to “work backward” and calculate how much you need to save based on your desired annual retirement income. For example, if you want to withdraw $50,000 your first year of retirement, you’d need to save $1.25 million ($50,000 x 25) to follow the 4% rule.

How long will $1 million last in retirement?

For many folks, $1 million is how much we’ve been told to save for retirement. But where you live and your lifestyle greatly affect how you’ll spend that $1 million.If you live in an area with high living expenses or you have health concerns that require assisted living, a home health aide or expensive medication, you might go through that amount of money quickly. If you live in a lower cost-of-living area and you’re relatively healthy, it may take you longer to go through that money.

What’s the difference between saving and investing?

The core difference between saving and investing lies in the accessibility of your money and the risks you take with it. Saving means keeping your money in secure accounts with little to no risk of losing your principal. On the other hand, investing involves buying assets like stocks, bonds or mutual funds that can potentially earn higher returns. Learn more in our guide to saving and investing to find the best approach for your golden years.

Sources

• Capital gains and losses. IRS. Accessed November 27, 2024.

• Retirement plan and IRA required minimum distributions FAQs. IRS. Accessed November 27, 2024.

About the writers

Yahia Barakah is a personal finance writer at AOL with over a decade of experience in finance and investing. As a certified educator in personal finance (CEPF), he combines his economics expertise with a passion for financial literacy to simplify complex retirement, banking and credit topics. He loves empowering people to make informed financial decisions that improve their everyday and long-term wellness. Yahia's expertise has been featured on FinanceBuzz, FX Empire and EarnForex. Based in Florida, he balances his love for finance with freediving, hiking and underwater photography.

Dori Zinn is a personal finance journalist with more than a decade of experience covering credit, debt, investing, real estate, student loans, college affordability and personal loans. Her work has been featured in the New York Times, the Wall Street Journal, Yahoo, Forbes and CBS News, among other top publications. She loves helping people learn about money.

Article edited by Kelly Suzan Waggoner