Retirement income withdrawal strategies

The core problem most retirees don’t plan for

Retirement planning often focuses on saving and investing. But in retirement, you need to turn savings into income.

Withdrawing from the wrong accounts can be expensive. A 2026 analysis found that retirees who optimized their withdrawal sequence—rather than following a conventional approach—saved $124,144 in lifetime taxes and had a portfolio worth $650,000 more at age 100.¹,²

Why withdrawal sequencing matters

Not all retirement accounts are taxed the same way—which is why it’s important to withdraw money from these accounts in the right order. For retirees who want to maximize growth and minimize the impact of taxes, the following sequence usually makes the most sense:

1. Taxable accounts like brokerage or savings accounts that don’t offer ongoing tax benefits.
2. Tax-deferred accounts like traditional 401(k)s and IRAs that are taxed as income.³
3. Tax-free accounts like Roth IRAs have tax-free withdrawals, and there are no required minimum distributions.³

Of course, this sequence isn’t right for everyone. There are other factors—such as tax brackets, income, and RMD timelines—that could affect your withdrawal strategy. A financial professional can model the best sequence for your accounts.

The 4% rule: a starting point, but not a complete plan

The 4% rule, developed by William Bengen in 1994, identifies the withdrawal rate that kept portfolios intact through 30 years of historical market cycles.⁴

Here’s how it works:

• In your first year, withdraw 4% of your portfolio, then adjust each year for inflation, usually 3%.
• This means that if you have $800,000 saved, you’ll withdraw $32,000 in year one.
• In year two, you’ll take out $32,960. In year three, you’ll withdraw $33,949.

But the 4% rule has limitations:

• It was built for a 30-year retirement. Today, many retirees live much longer.
• It doesn’t account for your taxes, healthcare, or income from Social Security and annuities. These may reduce the withdrawals needed.
• It assumes a fixed withdrawal, but most retirees spend differently.

You can still use the 4% rule as a benchmark to pressure-test whether your savings are in the right ballpark. But working with a financial professional can determine the real percentage you should be working towards.

Planning for required minimum distributions (RMDs)

The IRS requires minimum withdrawals from traditional 401(k)s and IRAs starting at age 73. Under the SECURE 2.0 Act, that age rises to 75 for anyone born in 1960 or later, beginning in 2033. However, you don’t have to wait that long to take distributions. You can begin as early as age 59 1/2 if you need the income, or if you want to reduce your future tax burden by whittling down your tax-deferred accounts. 

Without proactive planning, RMDs can significantly increase taxable income in retirement—and may possibly trigger Medicare IRMAA (Income-Related Monthly Adjustment Amount) surcharges.⁵ Fortunately, there are several strategies that can help reduce the impact of future RMDs:

• Consider a Roth conversion. Roth conversions in lower-income years can reduce future required withdrawal amounts.
• Make qualified charitable distributions. This allows you to donate directly from an IRA and satisfy the RMD without adding to your taxable income.
• Coordinate annual withdrawals. Arrange your annual withdrawals with other income sources to stay within favorable tax brackets each year.

Retirement budgeting means spending with intention

Before you can build a withdrawal plan, you need to know how much you spend and which expenses are essential or discretionary.

• Essential expenses like housing, food, and healthcare should be covered by your “retirement income floor.”
• Discretionary expenses like travel or dining can be funded by investment withdrawals and adjusted in lean years.

Both types of expenses require separate but complementary solutions.

Guaranteed income for your “retirement income floor”

Tallying essential expenses is the first step to calculating your retirement withdrawal strategy. The income you need to cover these expenses is commonly known as your “retirement income floor.”

Once these essentials are covered, your portfolio’s job changes. It can stay invested, recover from downturns, and focus on growth above the floor.

Social Security can contribute to these foundational expenses. It typically replaces about 43% of pre-retirement income for average earners, but less for higher earners.⁶ Still, many retirees will notice a gap. Annuities can help by converting savings into additional guaranteed lifetime income.

Annuities for essential income

An income annuity turns a lump sum into guaranteed lifetime income. It can make sense when:

• Social Security doesn't fully cover your essential monthly expenses.
• You’re concerned about running out of money.
• You want a predictable paycheck rather than monthly portfolio withdrawals.

Avoid “sequence of returns risk” with discretionary spending

Once you have secured a “guaranteed retirement income floor” that covers essential expenses, you may rely on variable income from the rest of your portfolio for non-essential spending.

But what if you experience a significant market downturn in the first few years of your retirement? Withdrawing from a portfolio during a downturn can lock in losses and derail your retirement plan.⁷ This is known as sequence-of-returns risk.

The cash value from a whole life insurance policy can serve as a spending buffer. You can use it as a source of funding during a downturn without withdrawing from your portfolio. A financial professional can illustrate how you can secure your lifestyle without compromising portfolio growth.

How a financial professional can help

The decisions in a retirement withdrawal strategy don’t exist in isolation—sequencing, tax planning, RMD timing, and Social Security decisions all affect each other. A financial professional can help build a plan that gets revisited as your circumstances, markets, and laws change.

What New York Life can offer

Consult with a financial services professional who can help guide you based on your goals, risk tolerance, and time horizon. With more than 12,000 financial professionals nationwide, you can find a local professional to create a strategy that works best for you.

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