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Systematic withdrawal plans: Help make your retirement savings last

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After decades of planning and saving for retirement, you're finally on the verge of tapping into your funds. It's a big change and preparing for it requires a different spending mindset.

A systematic withdrawal plan can help you regulate the new cash flow of your lifetime savings. This strategy disburses your money in a way that helps ensure your past investment efforts will last throughout your life.

These retirement money management tools are common and relatively easy to set up. Read on to learn whether one of these plans could be right for you.

What is a systematic withdrawal plan?

Systematic withdrawal plans let you set up a structure for tapping into your retirement savings periodically with the goal of giving you a predictable cash flow, either separate from or supplementing what you will get from Social Security.

These withdrawal plans can be set up for many different kinds of retirement savings and assets, including 401(k)s, mutual funds, brokerage accounts and IRAs. Some products, such as annuities, have a built-in systematic withdrawal plan for retirement as they are often set up to provide you with regular payments for the rest of your life.

Figuring out how much you'll need to systematically withdraw

A systemic withdrawal plan may ask you to set either an exact amount or a percentage of your balance that you want to take out every year. Knowing how much you should withdraw may feel like a hurdle. You may not yet have a good idea of what you'll need month-to-month. You can arrive at the amounts logically by tackling three questions:

How much Social Security income do/will you have?

This may take some legwork to figure out because the right time to claim Social Security is different for everyone. The Social Security Administration has a number of calculators to help estimate the amount of your benefit if you claim at the earliest possible age (62), the latest possible age (70) or any age in between.

If you're waiting until later, you can still set up a systematic withdrawal plan now and modify it when your Social Security income begins.

How much in total assets are in your retirement portfolio?

The years before retirement are an important time for zooming in on exactly what accounts you have and how much is in them. If you have a mixture of employer-sponsored retirement accounts, IRAs, annuities, other investments or brokerage accounts, you'll also want to determine which ones you should tap into first based on tax efficiency or certain withdrawal rules, such as required minimum distributions (RMDs). This is an area where your financial advisor can offer helpful guidance.

What portion of your savings do you need every year?

Managing your retirement savings requires a balance between withdrawing enough to support your needs (and some wants) and retaining enough to continue growth. So you'll first need to know your budget. Then you can decide what combination of Social Security and other retirement savings income you're going to need.

Once you know that, you can assess if it will work better for you to cover that by taking a specific amount from your retirement savings every year or a percentage. Many sources consider between 3% and 4% of your total retirement assets to be a reasonable withdrawal rate each year as long as your investments' overall rate of return supports that. Everyone's needs are different, however, so you may need more or less than this recommended amount.

How to set up a systematic withdrawal plan

For many accounts, all you need to do to set up a systematic withdrawal plan is fill out a form from your account manager or brokerage agent. In addition to how much or what balance percentage you want to withdraw and when, you'll likely be able to choose how you want to receive the money, such as by direct deposit or by check.

Because retirement investments offer different options for systematic withdrawals, it's a good idea to review all the choices available before you set up a plan. For example, you may be able to choose whether to take planned withdrawals annually, twice a year or monthly.

One thing to be sure to check before you submit the paperwork to put your systematic withdrawal plan in place is whether your account has withdrawal requirements such as RMDs. You'll want to make sure your total yearly distribution lines up with RMD rules to avoid any excess tax liability.

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How to plan for taxes in retirement

As you gear up to leave the workforce and rely on your savings for income, knowing how to plan for taxes in retirement becomes a very helpful skill to have. Learn how to work tax-efficient strategies into your financial plan to help you boost your long-term financial health. 

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Considerations for your systematic withdrawal plan

The greatest benefits of a systematic withdrawal plan tend to happen when they've been set up thoughtfully. Here are some pros and cons of systematic withdrawal plans to guide your decision-making:

Pros of systematic withdrawal plans

  • Budgeting confidence. Overspending and running out of money is a significant concern for retirees. A systematic withdrawal plan can help protect you from depleting your funds too early. You can use it to help you budget the way you would with any income stream.
  • Automated income. While it may take some calculations and strategizing to put a systematic withdrawal plan in place, you're setting yourself up to not have to think as much about it later. You'll want to revisit your setup regularly to make sure it's still advantageous for you, but automating it can let you focus on the here and now.
  • Optimized taxation. Going through the steps of setting up a systematic withdrawal plan can get you thinking in advance about the most tax-efficient ways to take money from your retirement accounts. Particularly if you seek guidance from a financial advisor and tax professional, you'll likely be maximizing your money.

Potential cons of systematic withdrawal plans

  • There could be excess charges. Many retirement accounts and investments charge transaction fees, which can include withdrawals. If you set up a systematic withdrawal plan for an account that you don't really need to tap every year (or month, depending on your chosen frequency), then you could be creating an unnecessary cost for yourself. You can mitigate this by choosing your accounts wisely when setting up your plans.
  • You may need future modifications. If your budget or market conditions change, you may find yourself wanting to change your plan more often than you anticipated. This can turn a management tool that was intended to make things easier for you into a burden. Leaning on the expertise of a financial advisor, however, can help you land on a plan that will last.

Tax considerations

Whenever you take a withdrawal from an account like your brokerage account or a retirement account, there is a potential tax liability. However, the kind of account determines just how much tax will be assessed.

For instance, you paid tax before investing in your Roth IRA, so you usually will have no tax liability on distributions, if they are taken according to the rules of the account. However, for brokerage accounts and non-Roth retirement accounts, you may be subject to income tax, capital gains tax or other taxes.

Part of talking to your financial advisor and tax professional involves assessing how much of a given systematic withdrawal plan will be needed just to pay tax liability. These pros also can help you determine how those withdrawals affect your portfolio's diversification.

Firming up your strategic retirement plan

Systematic withdrawal plans help you set a strategy in place so you can enjoy your retirement years with the reassurance you're doing all you can to use your savings mindfully. Choosing the details—the percentages or fixed amounts and their frequency—is important, and you may benefit from guidance. A Thrivent financial advisor can help you understand all of your options to maximize the longevity of your savings while still having the cash flow to live generously and in line with your goals.

Thrivent and its financial advisors and professionals do not provide legal, accounting or tax advice. Consult your attorney or tax professional.

Thrivent financial advisors and professionals have general knowledge of the Social Security tenets. For complete details on your situation, contact the Social Security Administration.