How to Create a Sustainable Withdrawal Plan in Early Retirement
One of the most critical challenges early retirees face is creating a withdrawal plan that ensures their savings last throughout retirement. Since early retirement often means funding decades of living expenses, it’s essential to establish a sustainable withdrawal strategy. This guide will help you develop a plan that balances regular income with the longevity of your retirement savings, allowing you to enjoy financial security without depleting your wealth too quickly.
Additional reading: How to Retire Early
Why Is a Sustainable Withdrawal Plan Important?
When you retire early, you’ll be drawing on your savings and investments to cover your living expenses for a much longer period than someone retiring at the traditional age. If you don’t plan your withdrawals carefully, you risk running out of money, particularly during market downturns or periods of high inflation. A well-designed withdrawal plan ensures that your money lasts for the entirety of your retirement while providing you with a steady stream of income to meet your needs.
Steps to Create a Sustainable Withdrawal Plan
1. Determine Your Annual Spending Needs
The first step in creating a sustainable withdrawal plan is to calculate your annual spending needs in retirement. This includes essential expenses like housing, utilities, food, transportation, and healthcare, as well as discretionary spending for travel, hobbies, and entertainment.
Once you have a clear understanding of your expenses, you’ll know how much money you need to withdraw each year to maintain your lifestyle. Be sure to factor in inflation when estimating future costs, as prices for goods and services will rise over time.
2. Follow the 4% Rule (With Caution)
The 4% rule is a popular guideline that suggests you can safely withdraw 4% of your savings annually during retirement without running out of money. The idea is that withdrawing 4% per year allows your investments to continue growing, offsetting the amount you withdraw.
For example, if you have $1 million saved, the 4% rule suggests you can withdraw $40,000 per year.
While the 4% rule can serve as a starting point, early retirees need to be more cautious. Since you’ll likely have a longer retirement period, consider adjusting your withdrawal rate to 3.5% or 3% to give your investments more time to grow and handle unexpected costs.
3. Diversify Your Income Streams
Relying solely on one source of income, such as stock market investments, can be risky during retirement, especially if the market experiences a downturn. To reduce risk, it’s essential to diversify your income streams. This can include:
- Dividends from stocks: Invest in dividend-paying stocks to receive regular income even during market volatility.
- Rental income: Real estate can provide a reliable stream of passive income in retirement. With mogul, you can invest in professionally managed real estate projects and earn monthly dividends from rental properties.
- Interest from bonds: Bonds offer a steady income stream and are less volatile than stocks, making them a good complement to other investments.
Diversifying your income allows you to withdraw less from any single source, which helps protect your savings during periods of economic instability.
Sustainable Withdrawal Strategies
1. The Bucket Strategy
The bucket strategy is a popular method for managing withdrawals in retirement. It involves dividing your assets into three “buckets,” each designed to meet different time horizons:
- Short-term bucket: Holds 1-3 years’ worth of living expenses in cash or low-risk investments, like bonds or money market accounts. This bucket provides stability during market downturns and ensures you have immediate access to cash.
- Medium-term bucket: Holds 3-10 years’ worth of expenses in a mix of stocks and bonds. This bucket generates moderate growth while maintaining lower risk.
- Long-term bucket: Holds investments intended for long-term growth, such as stocks and real estate. This bucket is designed to appreciate over time and replenish your other buckets when needed.
By maintaining separate buckets, you reduce the need to sell stocks or other high-growth investments during market dips, protecting your long-term wealth.
2. Dynamic Withdrawal Strategy
A dynamic withdrawal strategy allows you to adjust your withdrawals based on your portfolio’s performance. During years when your investments perform well, you can afford to withdraw more, while in years when the market underperforms, you scale back your withdrawals to preserve your principal.
This approach helps protect your savings during economic downturns and ensures you don’t run out of money too soon.
3. Withdrawal from Tax-Advantaged Accounts
When withdrawing from your retirement accounts, it’s important to consider the tax implications. If you have multiple types of accounts—such as Roth IRAs, traditional IRAs, or 401(k)s—there’s a tax-efficient order to follow:
- Taxable accounts: Withdraw from these accounts first to minimize taxes, as long-term capital gains are typically taxed at lower rates than ordinary income.
- Tax-deferred accounts: Withdraw from your 401(k) or traditional IRA next. These accounts are subject to ordinary income tax, so careful planning is required.
- Roth IRAs: Since withdrawals from Roth IRAs are tax-free, consider leaving these accounts for last to maximize their tax benefits.
By withdrawing from the most tax-efficient accounts first, you can reduce your overall tax burden and make your savings last longer.
The Role of Real Estate in a Sustainable Withdrawal Plan
Real estate investments provide a steady source of passive income through rental properties, making them an ideal component of a sustainable withdrawal plan. Here’s how real estate can support your early retirement:
- Monthly income: Rental properties generate regular monthly income, which can supplement or even replace traditional investment withdrawals.
- Appreciation: Over time, property values tend to rise, allowing your real estate investments to grow in value and serve as a safety net during market downturns.
- Tax benefits: Real estate investors benefit from tax deductions, including mortgage interest, depreciation, and repairs, which reduce taxable income.
With mogul, you can invest in professionally managed real estate projects and start earning monthly dividends with as little as $250. This income can form part of your overall withdrawal plan, providing consistent cash flow while your other investments grow.
Adjusting Your Plan for Market Conditions
Retirement plans need to be flexible. Markets can fluctuate, and unexpected expenses can arise, so it’s essential to regularly review and adjust your withdrawal strategy. Monitor your investments annually and make changes to your withdrawal rate, spending, or portfolio allocation as needed to ensure your savings last for the entirety of your retirement.
Start building your real estate portfolio today with mogul and take the next step toward a financially secure early retirement.
Learn more: What is a Real Estate Mogul?
Disclaimer: The information provided in this guide is for educational purposes only and does not constitute financial, tax, or legal advice. Always consult with a licensed professional before making any financial or investment decisions.