Should You Systematically Withdrawal in Retirement?

By Bill Gordon, AIF®

Some retirees wish they could simplify money management. Estimating investment income, annual retirement plan distributions, and quarterly taxes can be a chore.  This is why some retirees choose to make systematic withdrawals. 

Just as they contributed a set amount per month to their retirement accounts while working, they now withdraw a set amount from their accounts each month, quarter, or year.

The simplicity of this may appeal to you.  However, the potential drawback is that a systematic withdrawal strategy can risk oversimplifying the complex matter of retirement income distribution.

How do these strategies work? A specific monthly, quarterly, or annual withdrawal amount is established, and then assets are sold or liquidated to generate the cash. As people commonly have multiple retirement or investment accounts, a comprehensive systematic withdrawal strategy arranges proportionate withdrawals from most or all of them. Sometimes, federal or state taxes can be withheld from the withdrawals.

Remember, investments will fluctuate in value and when sold so there are times when systematic withdrawal strategies may not work well. For example, say some of your investments have lost value, but your withdrawal amount stays the same. This means that a greater percentage of your investments may have to be sold to generate that income you have set up.

So, during this period, you are selling a greater percentage of your invested assets, assets that have the potential to grow in the future.

These withdrawals can take time to arrange. Most investment custodians will permit them, but paperwork is necessary.  Once a systematic withdrawal is set up, you will want to check to see how long it take to amend that schedule, in case you ever need to make changes. 

Tax issues must also be considered as well. Withdrawals from retirement accounts may be characterized as taxable income depending on which type of account the money is taken from. 

Also, note that required minimum distributions (RMDs) may apply to certain accounts after you reach age 70½.  When RMDs kick in you will have to be more diligent on your strategy since the amount of your RMD will change from year to year. 

There are pros and cons to adopting a systematic withdrawal strategy. A financial or tax professional may help you make an informed decision.