A Thoughtful Approach to Retirement Income
Planning for retirement is much more than saving diligently throughout your working years. It also requires a well-thought-out strategy for how to withdraw savings in a way that supports your lifestyle while ensuring your funds last for the entirety of your retirement.
Enter the systematic withdrawal strategy—a methodical approach to taking money from your retirement savings that balances income needs with financial longevity.
What Is the Systematic Withdrawal Strategy?
The systematic withdrawal strategy (SWS) is a method where retirees withdraw a set percentage or dollar amount from their retirement savings on a regular basis, typically monthly or annually. In a systematic withdrawal plan, you withdraw only the income (dividends or interest) generated by your investments, keeping the principal intact. This approach helps prevent running out of money and allows for potential growth of your investments, while still providing retirement income. However, the income amount will vary based on market performance.
This disciplined approach is designed to provide a steady stream of income while managing the risk of running out of money too soon. Unlike ad hoc withdrawals, SWS helps retirees avoid impulsive spending, market-timing pitfalls, or overestimating how much they can safely withdraw.
How It Works
Determine a Withdrawal Rate
The first step is to calculate a sustainable withdrawal rate. A common starting point is the “4% rule,” which suggests withdrawing 4% of your savings in the first year of retirement and adjusting for inflation in subsequent years. However, the ideal rate depends on factors like:
Expected retirement length Personal risk tolerance
Set a Withdrawal Schedule
Decide how often you want to withdraw—monthly, quarterly, or annually. Regular withdrawals can help align your income with your expenses and reduce financial stress.
Adjust Over Time
Your withdrawal rate isn’t set in stone. Economic conditions, market performance, and changes in your spending needs might require you to revisit your strategy periodically. Example illustration:
