I'm a Financial Planner: This Retirement GPS Helps With Navigating Your Drawdown Phase

Your career has been like driving up a mountain, rising to every challenge and accumulating rewards — retirement savings — along the way.

Now you're a few years from reaching your peak earnings and retiring. When that happens, the view from the mountaintop will be satisfying and well-earned.

Then what? How will descending the mountain look and feel when, after decades of building a nice nest egg, you'll no longer be accumulating and instead will be switching gears dramatically into the drawdown/withdrawal phase of your retirement accounts?

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Kiplinger's Adviser Intel, formerly known as Building Wealth, is a curated network of trusted financial professionals who share expert insights on wealth building and preservation. Contributors, including fiduciary financial planners, wealth managers, CEOs and attorneys, provide actionable advice about retirement planning, estate planning, tax strategies and more. Experts are invited to contribute and do not pay to be included, so you can trust their advice is honest and valuable.

If you're not careful and thorough with your retirement planning, it can feel as hair-raising as driving down a mountain without brakes.

Many people worry about running out of money in retirement, and that concern has risen in recent years because, in general, we're living longer.

Knowing how to navigate the drawdown phase is crucial. Here are some important tips.

The bucket strategy

You'll want effective ways to access your savings in retirement so you'll have enough income to last, avoid unnecessary taxes and preserve and grow your portfolio's value.

The bucket strategy divides your savings into buckets geared to different timeframes and needs in retirement. This approach might offer several advantages for retirees:

Risk management. Retirees can reduce the impact of market volatility on their immediate income needs when they allocate assets according to when they'll be needed.

Inflation-protection strategies. The growth bucket allows for continued investment in assets with the potential to outpace inflation, preserving the purchasing power of your savings.

Flexibility. The plan can be adjusted based on changing needs, market conditions and personal circumstances.

Clarity and confidence. A structured plan can provide confidence, knowing that you have a strategy to fund each phase of retirement.

The core and liquidity bucket

This covers your essential living expenses. It can be a combination of cash, money market funds, high-yield savings accounts and a CD ladder.

It's also funded by your fixed retirement resources such as Social Security, pensions and fixed index annuities.

The liquidity bucket should include an emergency fund of at least six months of living expenses.

This bucket needs to be coordinated appropriately with required minimum distributions. This bucket covers retirement years one through three, on average.

The income bucket

This low-risk bucket is intended to generate steady income for the midterm phase of retirement, usually covering years four to seven.

It might include fixed-income investments such as bonds, annuities or dividend-paying stocks that provide a reliable stream of income while still offering some potential for growth to keep pace with inflation.

You're not dipping into this bucket early in retirement, but you need to be careful not to jeopardize this bucket with more aggressive investments that carry higher yields but also higher risk.

The growth bucket

This third bucket is focused on long-term growth and is meant to sustain you in the later stages of retirement, beyond eight years.

It's typically invested in a diversified portfolio of stocks, exchange-traded funds (ETFs), mutual funds and other growth-oriented assets.

The growth bucket often contains higher-risk/higher-yield investment strategies that will help fight inflation and fund future expenses, such as dream vacations or big-ticket items.

It is designed to weather market fluctuations. You shouldn't have to worry about being forced to sell long-term investments in the event of a market downturn if you have other buckets to pay your immediate costs.

These assets typically won't be needed for more than a decade.

Proportional withdrawals, coordinated with the bucket strategy

This involves taking funds proportionally from different accounts — taxable, tax-deferred (traditional 401(k) and IRAs) and Roth accounts — to reduce the tax impact of withdrawals. Draw from taxable and tax-deferred accounts first, then from Roths.

Roth conversions of tax-deferred accounts can be a key strategy to reduce retirement taxes. Required minimum distributions (RMDs) take effect for most people when they turn 73, but withdrawals from Roths are not subject to RMDs and are tax-free.

Those with tax-deferred accounts, however, can push themselves into a higher tax bracket in retirement if they haven't withdrawn much of their money before 73.

The proportional approach requires customization, and it makes sense to consult your tax and financial advisers.

Be wary of the 4% rule

The 4% rule is a popular retirement guideline. It suggests that retirees can withdraw 4% from their portfolios in their first year of retirement and adjust that amount for inflation in subsequent years. The goal is to make their savings last 30 years.

But the 4% rule has several important issues and limitations. Here are some:

It's outdated. The rule was derived from U.S. market data from the 20th century, which creates significant limitations when applied universally to international markets and modern economic conditions. It assumes future returns on stocks and bonds will mirror past performance.

Sequence of returns risk. Retirees are most vulnerable in the early years of retirement. If markets perform poorly early on, the portfolio might be depleted faster, even if average returns recover later. The 4% rule doesn't account well for this "bad luck" risk.

Inflation assumptions. In high or persistent inflation environments, the real value of withdrawals might not keep pace with expenses (especially health care or housing).

One-size-fits-all approach. Everyone has different risk tolerance, expenses, health/longevity expectations, income sources and retirement time horizons. The rule assumes no flexibility in spending, which is unrealistic. Most retirees adjust spending based on market conditions or personal circumstances.

It doesn't account for taxes or fees. Withdrawals might be taxed (e.g., from traditional 401(k)s or traditional IRAs), and portfolios often have management fees. These reduce the actual amount a retiree can spend, making 4% potentially too optimistic.

Considering these issues and imitations, you might want to consider more personalized strategies that account for longevity and risk management.

Generating income on top of Social Security

In retirement, from an investment standpoint, it's important to change your mindset to "preserve-plus-grow." That means balancing the protection of your assets from market volatility with generating investment growth.

The goal of preserve-plus-grow is to have a stable income stream while your portfolio keeps up with inflation or outpaces it with a core segment of your retirement portfolio.

This might be achievable with a mix of low-risk and moderate-risk investments. Having a diversified portfolio is one strategy that could help.

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To support both asset preservation and growth, consider diversifying your investments across multiple asset classes, including various types of stocks and bonds. As you progress through retirement, gradually reducing stock exposure might help manage risk.

Diversification through index funds and ETFs, including options that track the S&P 500, could help address stock volatility.

In the long term, a balanced mix of stocks and bonds can offer both growth potential and income, although results will vary based on market conditions. The percentage allocations should be adjusted for each person's needs.

Here are some investment options that might generate income in retirement:

Dividend growth stocks. These are the stocks of established companies that consistently pay and increase their dividend payouts. In an inflationary environment, these companies can often pass on higher costs to consumers.

But as their revenues grow, they can increase their dividends, potentially providing a rising income stream that helps offset inflation.

Treasury inflation-protected securities. TIPS are government bonds with principal value that rise and fall with inflation, as measured by the Consumer Price Index (CPI).

When the principal is adjusted for inflation, your semiannual interest payments also increase, as they are a fixed percentage of the adjusted principal.

However, returns from TIPS might be lower during periods of low inflation or deflation, making them most effective in higher inflation environments.

Real estate investment trusts. REITs involve companies that own income-producing real estate, which can be invested in via a mutual fund or ETF.

When inflation pushes property values higher, REITs' revenues and stock prices often rise.

But note that REITs are susceptible to interest rate changes and economic downturns. The dividend income is often taxed at a higher rate than other stock dividends.

It's important to develop a road map for your retirement drawdown years to help navigate the long ride down the mountain.

Having a comprehensive plan with an eye on tax efficiency and a preserve-and-grow approach might support lasting financial resources and contribute to a more confident retirement.

Dan Dunkin contributed to this article.

The appearances in Kiplinger were obtained through a PR program. The columnist received assistance from a public relations firm in preparing this piece for submission to Kiplinger.com. Kiplinger was not compensated in any way.

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• Which of These Four Withdrawal Strategies Is Right for You?
• The 'Permission to Spend' Rules of Retirement Spending
• How to Be Strategic With Your Retirement Withdrawals
• Retirement Income Strategies for the Long Haul
• One Good Way to Withdraw Retirement Assets (and a Bad One)

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Investing involves risk, including the potential loss of principal. Past performance does not guarantee future results. This material is intended for informational and educational purposes only and does not constitute investment, tax, or legal advice. The strategies discussed may not be suitable for all investors. Individual results will vary, and investment decisions should be based on your unique goals, time horizon, and risk tolerance.

Dividend payments from stocks and real estate investment trusts (REITs) are not guaranteed and may be reduced or eliminated at any time.

Returns from Treasury Inflation-Protected Securities (TIPS) may be lower during periods of low inflation or deflation. REITs are sensitive to interest rate changes and economic downturns, and dividends may be taxed at a higher rate than other forms of investment income.

Diversification and asset allocation strategies do not ensure a profit or protect against loss in declining markets.

Investment advisory products and services made available through AE Wealth Management, LLC (AEWM), a Registered Investment Adviser. You should consult a financial professional regarding your individual situation before implementing any investment strategy. AE Wealth Management does not provide tax or legal advice. Please consult with a qualified professional for such guidance. 3359115 - 10/25