Create A Distribution Plan

How much money can you afford to take out of your retirement savings annually?

The table below estimates how long savings will last based on different withdrawal rates and asset allocations. The table was built using methodology similar to that used in the 1997 Trinity Study, well-known research that has helped investors determine a withdrawal rate with an acceptable level of probability that they won't deplete savings too soon.

The table shows how the rate of withdrawal and various portfolio allocations can affect the chance of meeting income needs over a 25-year retirement. A high probability indicates it is more likely you will meet your income needs in retirement, while a low probability indicates you are less likely to do so.

For example, if you had a portfolio with 50% stocks and 50% bonds and you annually withdrew 6%, there would be a 51% chance of meeting your needs. It is assumed that a person retires at year zero and withdraws a required income need each year beginning in year one.

Probability of meeting income needs
 
100% Bonds 75%B|
25%S		 50%B|
50%S		 25%B|
75%S		 100% Stocks
Annual Withdrawal Rate 4% 86% 97% 96% 93% 90%
5% 32% 70% 79% 80% 77%
6% 3% 25% 51% 61% 63%
7% 0% 4% 26% 42% 49%
8% 0% 0% 11% 26% 36%

There are a number of factors that can impact whether a portfolio will last through retirement. The table shows how the amount of withdrawal and various portfolio allocations can affect the chance of meeting income needs over a 25-year retirement. It is assumed that a person retires at year zero and withdraws an inflation-adjusted percentage of the initial portfolio wealth each year beginning in year one. Annual investment expenses were assumed to be 0.79% for stock mutual funds and 0.62% for bond mutual funds. A high probability indicates that an investor is more likely to meet income needs in retirement, while a low probability indicates that an investor is less likely to do so and may face shortfall. The chance of a portfolio running out over a long retirement is less likely as the amount withdrawn decreases and as equities are added. Keep in mind that returns and principal invested in stocks are not guaranteed and they have been more volatile (risky) than bonds.

Source: Morningstar Inc. IMPORTANT: Data generated by Morningstar regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results. Results may vary over time and with each simulation. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. ©2013 Morningstar. All rights reserved.

The image was created using Monte Carlo parametric simulation that estimates the range of possible outcomes based on a set of assumptions including arithmetic mean (return), standard deviation (risk), and correlation for a set of asset classes. The inputs used are historical 1926 through 2012 figures. The risk and return of each asset class, cross-correlation and annual average inflation over this time period follow. Stocks: risk 20.2%, return 11.8%; bonds: risk 5.6%, return 5.5%; correlation –0.01; inflation: 3.1%. Other investments not considered may have characteristics similar or superior to those being analyzed. The simulation is run 5,000 times, to give 5,000 possible 25-year scenarios. A limitation of this simulation model is that it assumes a constant inflation-adjusted rate of withdrawal, which may not be representative of actual retirement income needs. This type of simulation also assumes that the distribution of returns is normal. Should actual returns not follow this pattern, results may vary.

Government bonds are guaranteed by the full faith and credit of the US government as to the timely payment of principal and interest, while returns and principal invested in stocks are not guaranteed.

Stocks in this example are represented by the Standard & Poor's 90 Index from 1926 through February 1957 and the S&P 500® index thereafter, which is an unmanaged group of securities and considered to be representative of the US stock market in general. Bonds are represented by the five-year US government bond, inflation by the Consumer Price Index and mutual fund expenses are from Morningstar. An investment cannot be made directly in an index. The data assume reinvestment of income and do not account for taxes.

While asset allocation, withdrawal rate and longevity are important factors in retirement income planning, you'll also want to consider:

Next steps

Consult with your financial advisor to determine an appropriate rate of withdrawal for your circumstances.

These calculators will help as you rethink your investment strategy:

Learn more about distributing your assets by reading Withdrawal Rates.

Asset allocation does not guarantee a profit or eliminate the risk of loss.

Once you determine a sustainable annual withdrawal rate, you can generally use one of these two basic methods to withdraw money:

  1. Dollar-adjusted withdrawals involve taking out an initial base amount and adjusting it annually for inflation. This method:
    • Provides a consistent, inflation-adjusted cash flow.
    • May deplete your savings too quickly if the markets experience a downturn.
  2. Percentage withdrawals involve withdrawing a certain percentage of your portfolio's value each year. This method:
    • Provides annual withdrawal amounts that fluctuate depending on your account balance, so you may have to adjust your spending if your balance drops because of a market downturn.
    • Increases the likelihood that your savings will last throughout your retirement.

The chart illustrates the different effects of these two withdrawal methods on a $500,000 retirement account over five years. As you can see, dollar-adjusted withdrawals increase steadily, while percentage withdrawals fluctuate but leave $20,041 more in the account after five years.

Compare Dollar-Adjusted Withdrawals With Percentage Withdrawals
In this example, withdrawals are taken at the beginning of each year.
  Returns (%) Dollar-Adjusted
Withdrawals ($)1		 Account
Balance ($)		 Percentage
Withdrawals ($)2		 Account
Balance ($)
Initial Balance - - 500,000 - 500,000
Year 1 8 25,000 513,000 25,000 513,000
Year 2 -5 26,000 462,650 25,650 462,983
Year 3 -6 27,040 409,473 23,149 413,443
Year 4 12 28,122 427,114 20,672 439,904
Year 5 0 29,246 397,868 21,995 417,909

This hypothetical example is for illustrative purposes only and does not represent any actual products or investments.

1 5% of initial portfolio balance adjusted annually for 4% inflation
2 5% of portfolio balance

Next steps

Work with your financial advisor to determine the best withdrawal method for your circumstances.

Taxes play an important role in your distribution plan because investment earnings and account withdrawals are taxed differently depending on the type of investment and account.

Here's an overview:

Taxable savings and investment accounts

  • These include stocks, bonds, mutual funds, certificates of deposit and other savings that generate taxable interest, dividends and capital gains.
  • Investment earnings are subject to federal income taxes and possibly state income taxes and capital gains taxes.

Traditional IRAs and employer plans

  • Tax-favored employer plan types include 401(k), 403(b), governmental 457(b), profit sharing, SIMPLE or Simplified Employee Pension (SEP) plan.
  • Interest, dividends and capital gains accumulate tax deferred in the plan or IRA.
  • When you start withdrawing money, you'll generally have to pay income tax on the amount you receive at your ordinary tax rate unless you move your savings to another plan or IRA in a qualified rollover.
  • The portion of withdrawals representing nondeductible or after-tax contributions isn't taxed on distribution.

Roth accounts

  • These include a Roth IRA or a designated Roth 401(k), Roth 403(b) or Roth 457(b) account.
  • You benefit from deferring taxes on investment earnings and capital gains.
  • After you've reached age 59½ and had your account for five tax years, qualified distributions - including earnings - are tax free.

Carefully planning your sequence of withdrawals with taxes in mind helps you maximize your savings. It typically makes sense to keep your tax-deferred investments growing for as long as possible. Generally, the preferred sequence of withdrawals is:

  • Taxable accounts first.
  • Traditional IRAs and employer plans second.
  • Roth accounts last.

But this sequence may not always be the most advantageous when you consider these factors:

  • Because long-term capital gains are taxed at a lower rate than ordinary income, you may not want to withdraw from a taxable account if it would mean selling appreciated securities before you've satisfied the long-term holding period.
  • You may not want to reach the income level that triggers paying taxes on your Social Security retirement benefits.
  • If you're deciding whether to take taxable distributions from a tax-deferred account or nontaxable Roth distributions, you may choose to delay the taxable distributions if you expect to be in a significantly lower tax bracket in the future.

Next steps

Work with your financial and tax advisors to create a tax-efficient withdrawal plan that fits your personal situation and can help you make the most of your retirement savings.

Learn more about the tax implications of withdrawals from retirement accounts at irs.gov/retirement.

This information is not intended as tax advice. Investors should consult a tax advisor.

Factoring in required minimum distributions (RMDs) is an important part of your retirement distribution strategy.

Generally, at age 70½, you'll begin taking an RMD annually from traditional IRAs or employer retirement plan accounts. You aren't required to take RMDs from Roth IRAs during your lifetime, but, after your death, your beneficiary will have to take them.

Here are basic guidelines about RMDs:

  • You must begin taking RMDs from your IRA no later than April 1 following the calendar year in which you turn 70½. In subsequent years, the distribution deadline is Dec. 31.
  • Your RMD is calculated annually by dividing the adjusted balance of all of your IRAs on Dec. 31 of the previous year by the applicable divisor from the IRS Uniform Lifetime Table.
  • If you don't take your full RMD, you'll owe a 50% federal income tax penalty on any amounts you should have taken. Plus, you'll have to withdraw the total RMD amount and pay applicable income taxes.
  • You have to calculate RMDs separately for each of your traditional IRA and employer plan accounts. But you don't always have to withdraw the RMD from each account. For example, if you have multiple IRAs or 403(b) plans, you can choose to take all of your IRA RMDs from one IRA or all of your 403(b) RMDs from one 403(b) plan account. But 401(k) and other employer plan RMDs have to be taken separately from each account.
  • You can take out more than the RMD. Keep in mind, however, that distributions from a traditional IRA are added to taxable income in the year distributed.
  • You aren't required to take RMDs from Roth IRAs during your lifetime, but, after your death, your beneficiary will have to take them.

Next steps

Work with your financial advisor to include RMDs in your retirement distribution strategy.

Use the Required Minimum Distribution Calculator to determine your RMD.

Log on to irs.gov/retirement for additional information about RMDs.

This information is not intended as tax advice. Investors should consult a tax advisor.