Building investments is one challenge. Knowing what to do with them once you retire is another. The shift from accumulating to drawing down requires a different mindset — and a few key decisions that can meaningfully affect how long your money lasts.
The withdrawal phase is different
During your working years, the goal is simple: contribute regularly and let it grow. In retirement, you flip the equation — you’re drawing from the account while hoping the remainder keeps growing.
Two things make this harder than it sounds. First, you can’t know how long you’ll need the money. Second, there’s a risk called sequence of returns: if the market falls early in retirement and you’re withdrawing at the same time, you deplete the account faster than if the same decline happened later.
Withdrawal order matters
Most financial planners suggest withdrawing from accounts in this general order:
- Taxable brokerage accounts first — you’ve already paid taxes on contributions; gains are taxed at capital gains rates.
- Tax-deferred accounts next — Traditional IRA, 401(k) — withdrawals are taxed as ordinary income.
- Roth accounts last — qualified withdrawals are tax-free, so keeping them invested longer maximizes that advantage.
This isn’t a rigid rule — your tax situation and Required Minimum Distribution requirements will shape the actual order. But it’s a useful starting framework.
Required Minimum Distributions (RMDs)
Once you reach age 73, the IRS requires you to withdraw a minimum amount from most tax-deferred retirement accounts each year, whether you need the money or not. These Required Minimum Distributions are calculated based on your account balance and life expectancy factors published by the IRS.
RMDs don’t apply to Roth IRAs while the original owner is alive — another reason they’re valuable in late-retirement planning. For a full explanation of how RMDs work, see our guide: Required Minimum Distributions (RMDs) Explained.
Managing sequence of returns risk
If you retire at the start of a significant market decline, withdrawals combined with falling account values can compound quickly. Strategies that help:
- Keep 1–2 years of living expenses in cash or short-term bonds, so you don’t have to sell stocks during a downturn.
- Maintain a stock allocation so the rest of your portfolio can recover over time.
- Avoid withdrawing more than roughly 4% of your portfolio per year — a common rule of thumb, though individual situations vary.
When to consider annuities
An annuity is a contract with an insurance company that converts a lump sum into a guaranteed income stream — typically for life. For retirees worried about outliving their savings, certain types of annuities can provide security.
Not all annuities are created equal. Variable and indexed annuities can carry high fees and complex terms. If you’re considering one, make sure you understand exactly what you’re buying, what you’re paying, and whether the guarantees are worth the cost.
Keep it simple
Many retirees do well with a straightforward approach: a diversified mix of low-cost index funds, a cash buffer for near-term expenses, and a withdrawal rate that’s sustainable. The bigger decisions — when to claim Social Security, whether to buy an annuity, how much to keep in stocks — are worth discussing with a financial advisor who has a fiduciary duty to act in your interest.
Further Reading
This article is for general educational purposes only and does not constitute financial or investment advice. Consult a qualified financial advisor before making investment decisions.