5 Retirement Withdrawal Mistakes That Can Make a 'Safe' Plan Feel Tight

Many retirees work for decades, investing in their 401(k) plans until they finally have enough of a nest egg to stop working. Many people create a solid retirement plan on paper, but the realities of retirement life can be more expensive than they realize.

Here's why having a withdrawal plan is so vital for retirees, as well as some of the most common 401(k) withdrawal mistakes to avoid to help preserve your money for the rest of your life.

Why a withdrawal plan is vital for retirees

Making a plan for your retirement withdrawals is just as important as, if not more important than, your plan for building your retirement accounts. That's because the way you withdraw your retirement income impacts the amount of money you have to live on throughout your retirement years, as well as how much you pay in taxes.

There's a recommended amount to withdraw each year, as well as a recommended order for withdrawing from different accounts if you have several types of accounts.

The current withdrawal recommendations for retirees

The most widely followed and accepted guideline is the 4% rule. The 4% rule recommends that you withdraw 4% of your portfolio during your first year of retirement. Then, adjust for inflation every year after that.

The goal of the 4% rule is to help you preserve your retirement account for the long term, but many retirees say retirement is more expensive than they realized. To afford retirement and maintain your lifestyle, here are a few mistakes people make that can make retirement feel more unaffordable than expected.

Withdrawing from the wrong accounts first

As mentioned, there is a recommended order to withdraw from retirement accounts if you have more than one. That's because different types of retirement accounts have different tax rules. 401(k)s are usually taxed as ordinary income. However, if you have a Roth IRA, your withdrawals are tax-free if you meet certain qualifications.

Advisors recommend the traditional approach of withdrawing from taxable accounts first, then withdrawing from tax-deferred accounts, and finally withdrawing from tax-exempt accounts. However, Fidelity also explains that for some people, taking a small amount from each account every year may be more tax advantageous.

Ultimately, your withdrawal strategy largely depends on the amount of money you have saved for retirement and the types of accounts you have. A financial advisor can review your options and recommend the best way to withdraw funds from your accounts based on your goals.

Ignoring sequence-of-returns risk

Sequence-of-returns risk describes a scenario where the market drops during your early years of retirement. In the scenario, withdrawing money while your portfolio is losing value can negatively impact your withdrawals for the rest of your retirement years.

To avoid this mistake, having a large emergency fund that you can use during times of market declines can help you preserve the money in your retirement account until the market recovers.

Carrying a mortgage into retirement

Another mistake many retirees make is carrying a mortgage into retirement. Having a mortgage payment is a major fixed cost that can make it more difficult to live on a smaller retirement income. 

Most retirement planning calculators assume that retirees have paid off their mortgage.

Withdrawing too much too soon and leaving less to compound

There are a few reasons why retirees may withdraw too much too soon. For example, they may have a health scare that requires more payments than anticipated. They may have an expensive home repair, or they may want to enjoy their first few years of retirement by traveling extensively.

However, the drawback to withdrawing too much too soon is that it leaves less money to compound in your retirement accounts. Retirement success is about balancing the desire to enjoy your lifestyle with the practical need for your account to last as long as possible.

Failing to account for RMDs

RMD stands for Required Minimum Distributions. With the passage of the SECURE 2.0 Act, retirees must withdraw from their retirement plans at age 73. In 2033, the RMD age will increase to 75.

Delaying withdrawal from your 401(k) until age 73 gives your account time to grow. However, making a larger-than-expected withdrawal can push many people into a higher tax bracket, which can increase their tax payments.

A financial advisor can help determine whether or not your RMD will negatively impact your income taxes. There are also other strategies, like making Qualified Charitable Distributions, that an advisor may recommend to help lower your taxable income.

Bottom line

Worrying that your retirement savings are stretched thin can derail what you hoped to be a stress-free retirement. 

However, by structuring your retirement withdrawals more strategically and working with a financial advisor, you can help ensure your hard-earned investments last throughout your golden years.

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