Accumulating a high net worth is the first step toward a financially comfortable retirement. Upon retirement age, the focus shifts from accumulating wealth to preserving it. Specifically, you need to devise a withdrawal strategy that’ll preserve your nest egg while giving you the income you want.
With proper financial planning, high-net-worth retirees may have the funds they want for retirement, and also preserve their hard-earned nest egg. (Investments aren’t guaranteed, and portfolios can go down.)
Here’s how to go about creating a withdrawal plan. Based on the factors specific to your situation, you might use a combination of these common withdrawal strategies and more advanced strategies. Ultimately, a financial advisor can help you create a plan.
Key Factors to Consider When Creating a Withdrawal Plan
There’s not one withdrawal strategy that’s ready for every retiree or for even every high-net-worth retiree. Which strategy — or combination thereof — is right for you depends on your situation. These questions can help you assess your retirement finances and goals.
What Are Your Retirement Goals and Lifestyle?
How money gets spent during retirement is a deeply personal decision. You might want a retirement that looks very different from your neighbor’s, and possibly even very different from your coworker’s, business partner’s or relative’s retirement.
Many high-net-worth individuals hope to spend retirement traveling, seeing people, taking up a new (or old) hobby, and perhaps purchasing a dream home or cottage. Philanthropy, both in time and money, can also be a major part of how retirement is spent. Of course, there are any number of other things you might want to do.
Consider what lifestyle you want during retirement, and what your more major goals are. These answers will help determine how to use your savings. What you want to do impacts your withdrawals, both in amount and timing.
Your Investment Portfolio Composition
Asset allocation is as important as the withdrawal strategy. Even the best withdrawal strategy might not be sustainable if you’re over-exposed to risky assets. During retirement, wealth preservation often becomes more important than wealth accumulation.
Working with a financial advisor makes it easier to create a portfolio that’s designed to help preserve wealth. They might recommend risk-off assets, diversifying, guaranteed income investments, inflation hedges, or other ideas.
When choosing a financial advisor, look for someone who regularly works with high-net-worth clients. There may be alternative investments that would make sense for part of your portfolio. An advisor who works with high-net-worth individuals may be more familiar with investment options that are only available to accredited investors (e.g. high-net-worth investors).
To get paired with a financial advisor who works with high-net-worth clients, use the online financial advisor matching tool.
What Are Your Income Sources Beyond Savings?
In addition to your retirement savings, many high-net-worth individuals have other income streams too. You might receive income from one or more of these sources during retirement:
- Social Security: Social Security will probably be a smaller portion of your retirement income, but no source of income should be ignored.
- Business Interests: Some high-net-worth retirees still have ownership in one or more businesses. This might provide periodic distributions, depending on the business’s income and owners’ arrangement.
- Investment Properties: Rental properties may provide regular income, especially if the loan on a rental has been paid off.
- Pensions: Pensions are becoming less common, but they can provide regular guaranteed income if you have one.
- Royalties: If you’ve been successful in a creative industry, such as writing or photography, you may be entitled to quarterly, semi-annual or annual royalty checks. You might also receive royalties for mineral rights, a licensed product, or something else.
There are still many other potential sources of retirement income. If you have a less common source, discuss it with a financial advisor. They’ll help you evaluate how reliable the income source is, what income you can expect over time, and how that source could factor into your withdrawal strategy.
4 Common Withdrawal Strategies in Retirement
As a starting point, there are four common withdrawal strategies that are sometimes used by retirees of all income levels.
It’s important to note that even with these strategies, market fluctuations could affect the sustainability of withdrawals, and there is no guarantee that funds will last throughout retirement.
1. The 4% Rule
The 4% is a traditional and common guideline for how much can be withdrawn from a portfolio. According to historical data, withdrawing 4% of a portfolio’s value annually likely won’t decrease its principal over the long term. Sometimes the amount withdrawn is adjusted for inflation each year. (Past performance is not indicative of future results.)
For example, the rule would suggest withdrawing $40,000 annually if someone has a $1 million portfolio. This would then be supplemented by any other retirement income sources.
Withdrawing 4% is a decent starting point, but it often needs to be adjusted based on a retiree’s individual situation. It may be higher than necessary for high-net-worth retirees. If you have a $10 million portfolio and other income sources, for example, $100,000 might be more than you need to withdraw from savings. Depending on your income sources and portfolio size, you might consider taking out less than 4% annually.
2. Fixed-Dollar Withdrawals
A fixed-dollar withdrawal strategy takes a set amount from retirement savings each year, regardless of any changes in the portfolio’s value. This is another straightforward strategy, and it makes budgeting living expenses easy. You know how much you plan on spending.
This strategy doesn’t account for changes in market conditions or asset values. Withdrawing a set amount even when holdings decrease can greatly hamper how much principal you have. This could lead to lost potential returns in the future. For those without high net worths, it could also create risk that retirement savings run out.
A fixed-dollar withdrawal strategy might make sense, so long as the fixed amount is less than 4% of your portfolio’s value. Taking a relatively small portion each year might make budgeting easy, without compromising future savings too much.
3. Fixed-Percentage Withdrawals
Fixed-percentage withdrawals work as a modified 4% rule strategy. A set percentage of the retirement portfolio’s value is withdrawn annually, but the percentage isn’t necessarily 4%. It could be higher or lower, with lower possibly being more appropriate if you have a large portfolio.
Compared to a fixed-dollar withdrawal strategy, a fixed-percentage strategy trades income variability for reduced long-term savings risk. How much is withdrawn each year can change substantially, but it’s less probable that your portfolio won’t recover from a temporary downturn.
Should you wish to use a fixed-percentage withdrawal strategy, a financial advisor can help you calculate what percentage makes sense for you. They can also help you settle on a fixed-dollar amount if you prefer that.
4. Required Minimum Distributions (RMDs)
For tax-deferred retirement accounts, required minimum distributions (RMDs) are mandatory withdrawals that start at a certain age. Not withdrawing when subject to an RMD can result in a 50% excise tax on the amount that needs to be withdrawn.
You probably have at least one, or several, accounts that are subject to RMDs. They apply to a wide range of tax-advantaged retirement accounts, including IRAs, 401(k)s, 403(b)s, and others. RMDs start at age 73 (72 if you turn that age before January 1, 2023).
RMDs should factor into your withdrawal strategy. They won’t necessarily increase how much you withdraw but may shift which accounts you take withdrawals from.
A financial advisor can help you check when your accounts will be subject to RMDs, and make adjustments accordingly at that time.
Advanced Withdrawal Strategies You Should Know
More advanced withdrawal strategies might be used instead of the aforementioned common strategies, or in conjunction with one of the others. These more advanced strategies can make a lot of sense for high-net-worth retirees.
Also with advanced strategies, market fluctuations could still affect the sustainability of withdrawals, and there is no guarantee that funds will last throughout retirement.
1. Bucket Strategy and Dynamic Withdrawals
The bucket strategy involves dividing your portfolio into different “buckets” based on time horizons. Short-term buckets hold cash or low-risk investments for immediate needs, while long-term buckets can be invested in growth assets for future income.
Dynamic withdrawals are then taken from the appropriate buckets, adjusting for market conditions, portfolio value, and inflation. Most withdrawals are taken from the short-term buckets, although withdrawal rates from these buckets might be adjusted based on the performance of longer-term buckets.
2. Longevity Annuities
Longevity annuities usually provide guaranteed income starting at a later age. An investment now is untouched for some period (often years), and then the annuity returns regular, guaranteed payments. The payments usually continue for the remainder of the annuity holder’s life.
The guaranteed income that longevity annuities can provide is helpful later in life. At lower net worths, it may help ensure that retirees won’t outlive their savings. At higher net worths, it may reduce the risk that you’ll need to use intended inheritances for your own expenses.
3. Qualified Charitable Distributions (QCDs)
Qualified charitable distributions (QCDs) allow direct transfers from IRAs to qualified charities. There are several requirements that must be met:
- Most IRAs other than the SEP IRA and SIMPLE IRA are eligible
- Account holder must be at least 70½
- Charity must be 501(c)3 that can receive tax-deductible donations
- Donations must go directly from the IRA to the charity (bypassing the account holder)
- Total QCDs are subject to annual limits ($105,000 per person for 2024)
You might use QCDs to reduce income tax burdens, and/or to meet RMDs once age 73 (or 72). This is often the most tax-effective way to make large philanthropic donations.
Building a Sustainable Withdrawal Strategy
Whatever withdrawal strategy you use needs to be based on your financial situation, income needs, retirement goals, and other future hopes. There’s not one strategy that works in every situation.
A financial advisor will likely recommend taking into account the following factors, as you develop a personalized strategy for your retirement income.
Combining Withdrawal Methods
There’s usually not one withdrawal strategy for everyone, and especially not for every high-net-worth retiree. The best option is often a hybrid approach that provides both flexibility and risk management.
For example, using fixed withdrawals for essential expenses and dynamic withdrawals for discretionary spending can provide stability and adaptability. You might delay major philanthropic gifts until at least 70½, when you can incorporate QCDs.
This is just one example of how a hybrid approach could work. Consult a financial advisor to develop a hybrid approach that’s tailored to your situation. You can find a financial advisor who’s part of the Invested Better network if you don’t already have one.
Balancing Income, Investment, Tax, and Longevity Risk
A sustainable withdrawal strategy must balance risks and meet needs. Mainly, it needs to balance income, investment goals, tax liabilities, and longevity risk.
All of these strategies, common and advanced, aim to help manage these needs and risks. The most prudent way to manage everything is often combining several of the strategies, recognizing what need or risk each is well-tailored to meet or mitigate.
Adjusting the Withdrawal Plan Over Time
Retirement is not static but dynamic. Your desired lifestyle, physical needs, and financial picture will probably all change at various points during your retirement. Your withdrawal strategy should be adjusted accordingly when your needs or goals morph.
A financial advisor can regularly monitor your portfolio performance, alerting you to any substantial chances that might require attention (good or bad). They also can assist with adjustments if your personal situation or goals change.
Planning to Pass on a Legacy
Once your retirement income strategy is in place, you’ll next want to consider what happens to assets upon your passing. Estate planning should go hand-in-hand with retirement income planning.
How you choose to pass on your assets can impact what type of legacy you leave. A financial advisor can also assist with estate planning strategies, so your wealth is passed on as you wish. They’ll be able to help with deciding who should receive what, and how to best distribute your assets to your heirs, charities, or anyone else you want to bless
How a Financial Advisor Can Help You Choose the Right Withdrawal Strategy
A financial advisor who has experience helping high-net-worth clients can assist you in multiple ways. They’ll be able to:
- Assess your financial situation, goals, and risk tolerance
- Analyze your investment portfolio and recommend adjustments
- Develop a customized withdrawal strategy aligned with your needs
- Monitor your plan’s performance and make necessary adjustments
- Provide tax-efficient strategies to minimize tax implications
- Give strategies that aim to help secure your financial future
What to Look for in a Retirement Financial Advisor
There are a few details that you should check when seeking a financial advisor to assist with retirement.
First, look for someone who specializes in retirement planning. They might be a Certified Retirement Financial Advisor (CRFA), Certified Specialist in Retirement Planning (CSRP), or have a similar certification.
Second, ensure they’re a fiduciary who’s obligated to act in your best interest. You can ask about potential conflicts of interest, too.
Third, review their fee schedule. You might pay a one-time fee and/or an ongoing one, depending on what retirement planning services you want.
Find a Financial Advisor
At Invested Better, we help individuals connect with financial advisors. If you need a financial advisor who’s familiar with the needs of high-net-worth retirees, use our quick online tool to get matched with an advisor who’s well-qualified to assist you.
