Think You’ve Mastered Retirement Plan Withdrawals? Here’s the Big Mistake You Could Be Making

If you’re nearing retirement, congrats! After a lifetime of saving and hard work, you may finally be ready to start enjoying the wealth you’ve accumulated.

One thing you’ll often hear is that it’s important to come up with a solid withdrawal strategy for your retirement savings. If you don’t, you risk running out of money at some point in your lifetime.

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Part of that means establishing a safe baseline withdrawal rate — “safe” being a relative term, of course. There’s no single withdrawal rate that guarantees your savings won’t run out. But with a fairly equal mix of stocks and bonds, the 4% rule, or a withdrawal rate in that vicinity, may be appropriate for you.

But managing your retirement plan withdrawals goes beyond figuring out what percentage to take out per year. There’s another piece of the puzzle you can’t afford to overlook.

It’s more than a matter of your withdrawal rate

The purpose of establishing a withdrawal rate for your savings is to take the guesswork out of your finances. If you land on a 4% rate, for example, and have $1 million saved, you’ll take a $40,000 withdrawal your first year of retirement and adjust subsequent withdrawals for inflation.

That strategy might work when the market is up or even flat. But if the market crashes, sticking to a fixed withdrawal strategy could hurt you.

Let’s say the market crashes early in retirement and your portfolio value drops to $750,000. If you continue to withdraw $40,000 a year, that’s a 5.3% withdrawal rate — not 4%.

Now, if you continue to take your $40,000 withdrawal in that situation and the market recovers fairly quickly, things may not get too bad. But if it takes the market a long time to recover and you continue tapping your savings based on your initial withdrawal plan, you could end up locking in serious losses you struggle to recover from.

Over time, that could put your money at risk of running out.

A flexible approach could serve you well

Rather than sticking to a fixed withdrawal plan regardless of how the stock market is doing, a safer approach is to base withdrawals on your portfolio’s performance. If it’s lost value, a smart move is to reduce spending — and withdrawals — to keep more of your portfolio intact.

The fewer assets you sell to generate income, the more assets you’ll keep around so that when the market eventually recovers, you’ll get to participate in that upside.

Of course, it’s also a good idea to maintain a cash cushion so you can cover a few years of living costs without tapping your portfolio. But even that doesn’t guarantee you won’t risk locking in losses.

If you stockpile enough cash to cover 24 months of living costs, and it takes the stock market three years to recover from a bad crash, that’s 12 months where you may be looking at selling assets when they’re down. So in that case, being flexible with your spending — and reducing it as much as possible — could be your ticket to preserving the savings you worked hard to build.

Don’t let your hard work go to waste

Saving for retirement is not an easy thing. It often requires a lot of sacrifice and comes at the expense of saying no to things like a nicer car, a bigger house, and more luxurious vacations.

After making the effort to build a strong nest egg, the last thing you want is to put yourself at risk of running out of money. Being flexible with withdrawals could be your ticket to stretching your savings for the long haul.