Avoid these mistakes when tapping into your retirement savings

Retirement planning isn’t just about growing your savings—you also need to be strategic about how you tap into them when it’s time. Read about some common mistakes people make when accessing their savings, and how to avoid them.

The biggest retirement withdrawal mistakes

When it comes to creating a retirement strategy, it’s important to remember that there are two key phases: accumulation and distribution. While most people focus solely on accumulation—that is, building up their assets through saving and investing—it’s just as important to make sure you have a distribution plan in place that ensures that your assets last as long as you need them.

Here are some of the common distribution mistakes you’ll want to avoid as you enter retirement:

1. Strictly following the 4% rule

The 4% rule is a simple guideline for retirement planning that suggests withdrawing 4% of your total portfolio value in year one of retirement, then adjusting that amount each year to account for inflation. While it’s a useful starting point, it’s not a one-size-fits-all solution. For starters, it doesn’t account for changes in your health, portfolio performance, or in the economy. For example, if you see that your portfolio is declining more rapidly than expected, you may need to scale back your withdrawals—at least temporarily—to make sure your savings last. Conversely, don't let the 4% rule keep you from covering essential expenses in retirement—whether it’s healthcare, a new car, or celebrating a child’s wedding. Your financial plan should support your needs and priorities, not limit them.

For affluent investors, the 4% rule may not be the most efficient strategy, especially when factoring in Required Minimum Distributions (RMDs). Since RMDs are based on the total value of your retirement accounts—and are fully taxable—the percentage you must withdraw increases each year. To manage your tax burden, it may be wise to take larger withdrawals before RMDs begin at age 73, potentially reducing future tax liabilities.

2. Overlooking sequence-of-returns risk

We all know that timing is everything in life—and that applies to your retirement portfolio as well. Sequence-of-returns risk is a term used to describe the impact that portfolio withdrawals can have in different market environments. The big risk in the distribution phase is what happens if there is a market downturn: Not only will your total portfolio value go down, but you’ll also need to sell more of your investments—at a lower price—to cover your expenses. And if this happens early in retirement, you’ll have fewer assets to rely on later in life and could miss a significant amount of growth when the market eventually recovers.

One way to protect yourself from sequence-of-returns risk is to have an easily accessible source of funds, such as the cash value of a life insurance policy¹ or other readily available assets, so that you can use it as an emergency stopgap measure (more on this below). That way, you can maintain your quality of life without having to sell low on your investments, preserving the value of your retirement portfolio.

3. Overlooking other sources of income

To keep sequence-of-returns risk from disrupting your financial stability, it’s important to have other ways of generating the income you need to maintain your retirement lifestyle.

Income annuities are one way to secure a steady, dependable source of income that lasts for the rest of your life. You can either start taking income immediately with an immediate annuity, or use a deferred income annuity which offers tax-deferred growth until you start taking income. Just make sure you understand the rules and tax treatments of different types of annuities. If purchased using pre-tax funds from your 401(k), IRA, or other pre-tax investment vehicles, your annuity is “qualified,” with income fully taxable and RMDs required. By contrast, a nonqualified annuity is funded with after-tax dollars; no RMDs are required, and only the growth portion of the annuity payment is taxable.  

Another option is a whole life insurance policy—especially one that offers enhanced cash value accumulation during the early years of coverage. That way, if you no longer need the full death benefit protection, you can use the cash value as a tax-free source of income when needed.^2,3

4. Being too cautious

Another mistake people make in retirement is becoming so risk-averse that they completely abandon growth investments for more stable assets like bonds and income annuities. While adding some stability to your portfolio is a good idea, it’s important to keep a long-term perspective as well. With many people now living into their 80s and 90s, your retirement savings may need to last 20-30 years. Keeping a portion of your portfolio in equities can help you pursue higher returns and counteract the effects of inflation and ongoing withdrawals, ensuring your wealth lasts as long as you do.

Just how much of your portfolio you keep in equities depends on a lot of factors, from your growth needs to your risk tolerance. That's why it’s important to work with a financial professional who can take these factors into account and strike the right balance.

5. Not distributing assets earlier

Taxes are a fact of life in retirement, and that’s particularly true once you turn 73 and have to start taking taxable required minimum distributions from your IRAs and 401(k)s.⁴ Rather than letting these taxable assets pile up and then find yourself pushed into a high tax bracket late in life, it might be a good idea to start taking income from these accounts earlier in retirement, in combination with sources of tax-free income. You can also find other ways to reduce your taxable holdings, such as:

• Gifting money to your loved ones on an annual basis. You can avoid having to report the gifts on your tax return if you stay below the maximum gift tax allowance ($19,000 per individual, or $38,000 per married couple, in 2025).⁵
• Using a qualified charitable distribution, which transfers money directly from an IRA to your favorite charity.
• Moving some of your pre-tax money to a Roth IRA, which is exempt from RMDs. (Just know that you’ll owe taxes when you initially do the Roth conversion.)

Have a plan before you retire

Even if you feel well-prepared for retirement, it's important to ensure that your financial security lasts throughout your retirement years. Unfortunately, factors like tax rules⁶, sequence-of-returns risk, and economic uncertainty make tapping into your retirement accounts a complicated endeavor. That’s why it’s important to work with a financial professional to develop a sound withdrawal strategy before you retire. With the right guidance and approach, you can avoid these and other potentially costly mistakes, while protecting the lifestyle and assets you’ve worked so hard to build.

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¹Accessing the cash value of a life insurance policy will reduce the available death benefit and cash value of the policy.

²You can access cash value via loans or through surrenders. When accessing cash value via loans, the total outstanding loan balance (which includes accrued loan interest) reduces your policy’s available cash surrender value and life insurance benefit. The amount you borrow will accrue interest daily. When accessing cash value through surrenders, you are surrendering any available paid-up additional insurance for its cash surrender value. This means that your policy’s cash value, available cash surrender value, and death benefit will be reduced.

³Certain tax advantages are no longer applicable to a life insurance policy if too much money is put into the policy during its first seven years, or during the seven-year period after a “material change” to the policy. If the cumulative premiums paid during the applicable seven-year period at any time exceed the limits imposed under the Internal Revenue Code, the policy becomes a “Modified Endowment Contract” or MEC. An MEC is still a life insurance policy, and death benefits continue to be tax free, but any time you take a withdrawal from an MEC (including a policy loan), the withdrawal is treated as taxable income to the extent there is gain in the policy. In addition, if you are under 59½, a penalty tax of 10% could be assessed on those amounts and upon surrender of the policy. In addition, withdrawals within 15 years after a policy is issued may be taxable to some extent if the death benefit under the policy is also reduced. You should talk to your tax advisor if you anticipate making withdrawals.

⁴You can access most tax-advantaged accounts, without penalty, starting at age 59½.

⁵Keep in mind that there is a lifetime federal gift and estate tax exemption that you cannot exceed without incurring tax penalties. For 2024, the total lifetime tax exemption is $13,610,000 per person.

⁶Neither New York Life nor its Agents offer legal or tax advice. Please consult your legal or tax advisor to find out whether the general concepts discussed in this material apply to your personal circumstances.