Maximizing Retirement Plan Withdrawals

Retirement plan withdrawals depend heavily on how much you anticipate spending in your golden years. Your living expenses could decrease in retirement, but they could also increase if you have plans to travel internationally.

Regardless of what you want to do in retirement, it’s important to have a plan for withdrawing from your investments, as you’ve likely spent many decades saving up.

How Much Will You Need?

Ideally, funding your retirement begins decades before you actually retire, but for some people, working longer may be necessary to afford retirement. Experts suggest starting with the 4% rule to help determine just how much you’ll need to save to meet your living expenses after retirement.

The rule limits retirement withdrawals from your savings to 4% of the total annually. This 4% can be reduced or increased after the first year depending on the inflation rate.

The 4% rule is often used in conjunction with the 25× rule. This one advises that you should save 25 times the amount of your anticipated annual expenses in retirement. Some experts recommend that you factor in any Social Security or pension benefits that you expect to receive during this time.

If you don’t have enough saved up by retirement age, you people may benefit from continuing to work, even if it’s just part-time. For example, you may consider a part-time job with flexible hours.

In a Federal Reserve survey completed in 2023, 80% of retirees said they were doing “okay financially.” However, a greater percentage of retirees (85%) who had wages and continued to earn income said they were doing “okay financially.”

“Having different income sources can take a weight off your shoulders,” says Taylor Kovar, certified financial planner and founder and CEO of 11 Financial in Lufkin, Texas. “You won’t be depending on just one for everything.”

Which Accounts Should You Use to Save for Retirement?

Retirement plans are a key component of overall retirement income, including workplace plans like 401(k)s and those you might establish yourself, such as an individual retirement account (IRA).

And even if you start investing later in life, it doesn’t have to derail your retirement plans. You can contribute more than the annual contribution limit beginning at age 50. These are referred to as catch-up contributions. The extra amount adjusts periodically to keep pace with inflation. The cap is $7,500 in 2025 for 401(k) plans, unchanged from 2024. It’s $1,000 for IRA plans.

401(k) plans often come with employer contribution matches as well. Your employer might contribute a percentage of every dollar you invest, helping you to increase your savings. However, you usually have to contribute at least a certain percentage of your salary to your 401(k) to receive the matching contribution.

The Bucket Approach

The bucket approach provides a way to put your various income sources to work. “You divide your savings into different buckets based on when you might need the money,” Kovar says. “You’d keep short-term funds in one bucket, money you’ll need in a few years in another, and long-term savings in a third. Each bucket gets different treatment depending on when you’ll need the funds.”

The approach typically includes three buckets dedicated to segregated retirement time spans and the most appropriate investments to include in them.

“Given uncertain economic conditions, it’s essential for individuals to consider inflation and opportunities for investments to grow so they can maintain their desired retirement lifestyle,” says Faron Daugs, certified financial planner and founder and CEO of Harrison Wallace Financial Group in Libertyville, Illinois.

The Short-term Bucket

The first bucket is dedicated to cash flow needs and includes safe, traditional savings options that will fund one to five years of basic living expenses. They can include:

“The purpose of bucket one is to provide stable income without concern for market volatility,” Daugs says. “I recommend keeping at least two years’ worth of anticipated distributions in investments that aren’t subject to market fluctuations or interest rate sensitivity.”

You can replenish the first bucket as you spend from it by liquidating assets in your midterm bucket and moving the funds into these vehicles.

The Midterm Bucket

Your midterm bucket would hold assets intended to fund your retirement from the fifth through 10th years. These won’t be as conservative as those held in your short-term bucket. You’ll want assets here that will hopefully keep pace with inflation without exposing your principal to a great deal of risk.

“Bucket two is focused on generating income through dividends and interest. While there may be some market fluctuations, this bucket is designed to provide income with downside protection,” Daugs says. “Bucket two typically includes investments that offer downside risk protection such as hedged equities, buffered ETFs, or value-driven stocks with solid dividends, and may also include closed-end funds.”

The Long-term Bucket

This one is for your high-risk investments. It’s intended to fund your needs in years 10 and beyond. Most stocks, index funds, and high-yield bonds would fall into this category. The idea is to incrementally move the growth that’s produced here to your short-term and midterm baskets as needed.

“Bucket three is designed for growth. The last bucket aims to outpace inflation and preserve the purchasing power of portfolios over time. The purpose of bucket three is to help grow the portfolio, providing future purchasing power, and combating inflation,” Daugs says.

“A few examples of the types of investments in bucket three include growth stocks, and a mix of passive and active management strategies,” according to Daugs. “It’s important to note that bucket three should be regularly reviewed and adjusted, ideally with a financial advisor, so it continues to align with the client’s long-term goals.”

Withdrawal Strategies

Any plan you devise will be greatly affected by how and when you begin taking withdrawals from your retirement plans. Numerous tax rules that apply to 401(k) plans and IRAs must be factored into the equation.

Required Minimum Distributions

The Internal Revenue Service (IRS) doesn’t get to collect taxes from your retirement accounts—such as traditional IRAs and 401(k)s—until you withdraw money from them. Those withdrawals are then included in your taxable income. Required minimum distributions (RMDs) are the federal government’s way of preventing you from leaving your money in traditional retirement plans indefinitely, avoiding taxation for as long as possible.

You must take your first RMD from a traditional retirement plan by April 1 of the calendar year after the year in which you turn age 73. You have until Dec. 31 to take the withdrawal beginning in the next year.

The IRS doesn’t dictate which plan you should tap first for your RMDs. The distributions must be calculated for each qualifying IRA plan you hold, and you must take the total by the applicable deadline. You can withdraw the total amount from just one of your accounts, although this rule doesn’t apply to 401(k) or 403(b) plans. Roth IRAs and designated Roth retirement plans aren’t subject to RMDs. They can continue to grow tax free.

You can be charged with a 10% to 25% tax penalty if you don’t take your RMDs.

Other Tax Rules

Traditional and Roth IRA and 401(k) plans are each subject to their own unique rules and tax treatment.

You can claim tax deductions for your annual contributions to traditional plans in the year you make them. Taxes don’t come due on this money until you take it out in retirement. You’ll pay taxes on the money you contribute to a Roth account at the time you contribute, but then you can take the money out tax free in retirement. Traditional IRAs also come with a 10% tax penalty if you take a withdrawal before age 59½.

The Bottom Line

It can be critical to educate yourself regarding the fundamental differences between various retirement plans and saving approaches. Consider touching base with a professional financial advisor if the bucket approach sounds like a good plan to you.