As an advisor, I get a certain question every day in one form or another.

Investors either in or nearing retirement ask, “How do I make my retirement savings last?” They want to know how much they can safely spend from their portfolio each year, which accounts (Roth IRA or 401(k)?) they should spend from, and in what order.

Start by setting goals

If I’m talking to an investor for the first time, I start by asking questions to determine their goals for their retirement nest egg. Most investors are seeking a certain amount of money annually to cover living expenses, but there’s more to it. Do they want to leave a portion of their wealth to family members? How about philanthropic wishes? Or is their goal to die broke? Yes, I’ve heard this a number of times in my career of 20+ years.

The answers to these questions can trigger a variety of outcomes, especially when it comes to which accounts to draw down and which accounts to leave for charities or heirs. Once I determine an investor’s goals, I want to know more about their expenses starting with fixed expenses (mortgage, car payment, utilities, etc.) and then their discretionary expenses (entertainment, travel, etc.). Then I look at all of their income sources (Social Security, pension) and portfolio account types (Roth IRA, traditional IRA, 401(k), etc.).

When thinking about how much to spend from a portfolio, many investors want to apply the income-only withdrawal strategy and never intend to deplete touch their principal. In today’s low-yield environment, that approach isn’t possible for most investors. The average investor won’t generate enough income to cover living expenses.

A different more realistic approach

We would suggest taking a total return approach to retirement spending. With this approach, after considering your goals, time horizon, income, and expenses, you establish a percentage that you’ll need from your portfolio. Most people have heard of the 4% spending rule. That’s a good starting point, but you’ll want to base your number on your individual situation and available resources.

After determining how much is needed to meet living expenses, you’ll need to consider which accounts you’re going to withdraw from and in what order. The chart below provides a summary of how we suggest investors prioritize their spending. There are always exceptions to this general framework for spending, but it serves as a good starting point.


(For more information on retirement withdrawal strategies, read our research paper From assets to income: A goals-based approach to retirement spending.)

One key decision point comes after you’ve depleted your taxable portfolio. Investors who anticipate being in a higher tax bracket in the future should consider spending from their tax-deferred accounts (pre-tax retirement plans such as traditional IRAs) next. In contrast, investors who expect to be in a lower tax bracket in the future should start by spending from their tax-free accounts (Roth IRAs).

The best retirement spending plans are flexible based on circumstances. Typically, we structure investors’ retirement spending based on a life expectancy of 100. If you’ve had a year with some unexpected expenses (health care), or the market has several down years in a row, your projected portfolio balances may take on a different trajectory. In other words, you may only have enough money to last until age 85 at your current withdrawal rate. In that case, we’ll suggest taking a look at how we can put your retirement plan back on a path to success.

Maybe we’ll look for ways to lower your expenses, such as cutting back on your discretionary spending. Or we could look at adjusting your retirement goals, including possibly leaving a little less to your heirs.

The retirement spending phase can be long (30 years or more!) and often winding (market dips, windfalls, and unexpected expenses). Having a flexible withdrawal strategy can help keep you from straying off-course.