6 Ways to Withdraw Money in Retirement
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How do you withdraw money in retirement? Whether you're part of the FIRE movement or planning a traditional retirement, understanding your options can make a huge difference. Today, I'm excited to walk you through six different strategies to help you determine what might work best for you.
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1. The 4 Percent Rule
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This is the classic method many people use. The basic idea is that you withdraw 4% of your portfolio annually. For example, if you have $1 million, youโd withdraw $40,000 per year. This rule adjusts for inflation each year, helping ensure you donโt run out of money. However, itโs based on a 30-year retirement, so if youโre retiring early, you might need to consider a lower withdrawal rate.
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2. The Ratcheting Rule
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Popularized by Michael Kitces, the ratcheting rule allows you to increase your spending as your portfolio grows. You start with a base percentage (like 3.5%) and set milestones (e.g., a 50% portfolio growth) at which you increase your spending by a set percentage. This method offers flexibility and the potential for increased spending during good market years.
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3. Flexible Spending Strategy
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I first heard about this from Nick Magguili, this strategy divides your spending into required (fixed) and discretionary (variable) expenses. Required spending covers necessities, adjusted only for inflation. Discretionary spending varies based on market performance. In good years, you maintain or increase spending; in bad years, you cut back. This method could support a higher withdrawal rate, like 5.5%, providing more spending power in retirement.
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4. Guardrail Strategy
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This strategy sets up boundaries around your withdrawal rate. For example, if you start with a 4% withdrawal, your guardrails might be 3% and 5%. If your portfolio grows or shrinks significantly, you adjust your spending accordingly. This method provides flexibility while protecting your finances during downturns.
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5. Bucket Strategy
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The bucket strategy divides your portfolio into short-term, medium-term, and long-term buckets. The short-term bucket covers 1-3 years of expenses and is kept in safe investments like high-yield savings accounts. The medium-term bucket (4-10 years) balances growth and preservation, while the long-term bucket (10+ years) focuses on growth. This strategy aligns your investments with your time horizons, offering peace of mind and strategic investments.
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6. Living Off the Interest
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This strategy involves living off the dividends and interest generated by your investments. For example, if your portfolio yields 2% annually, you live off that 2% without touching the principal. While this method preserves your capital, it typically requires a larger portfolio to generate sufficient income. Itโs a sustainable option but may limit your annual spending compared to the 4% rule.
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Whatโs My Plan?
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Personally, Iโm going for a hybrid approach. I invest in real estate, businesses, and index funds/ETFs, providing multiple income streams. Iโll keep cash on hand for 3-5 years to cover expenses during market downturns and rely on additional income sources like real estate cash flow. This mix of strategies provides security, flexibility, and the potential for growth.
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Final Thoughts
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Remember, building wealth is about more than just accumulating money. Itโs about creating a life you love and giving back to causes you believe in. Whether youโre planning to retire early or at a traditional age, having a solid plan in place is crucial. Explore these strategies, find what works for you, and stay flexible. Your financial plan can and should evolve over time.
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