Spending strategies in retirement

Read time: 11 to 13 minutes

Find out how to go from a retirement saver to a spender in retirement.

Explore withdrawal strategies
Examine 4 strategies that can help you achieve your goals.
Live your retirement dream
Learn how spending roadblocks can keep you from enjoying retirement.
Keep an eye on your investments
Find out how a diversified portfolio can help reduce market risk.

To save or spend? That is the question

When you transition from working to retirement, you’ll face a lot of changes. A big one is the switch from being a saver to a spender. Instead of putting aside money for retirement every paycheck, you’ll be living off that money.

Research has shown that well-off retired investors often don’t spend much of their retirement savings, but that could mean they don’t know how much is “safe” to spend. By being too cautious, they may be keeping themselves from fully enjoying retirement.

It may not be easy, but we’ll help you make the transition from saving to spending by looking at strategies for withdrawing and spending your savings, factors that can affect spending, planning required minimum distributions (RMDs), and ways to minimize taxes.

Withdrawal and spending strategies: Pros and cons

As you plan how and when to withdraw your retirement money, you’ll want a strategy that accomplishes 2 often-competing goals:

Goal 1. Having enough money to support your desired lifestyle.

Goal 2. Ensuring there’s plenty left for the future, including any money you plan to leave to heirs.

Let’s look at 4 withdrawal strategies that can help you achieve both goals.

1. Bucket

This strategy involves splitting your savings into different accounts based on your expenses. For example, you might keep a few months’ worth of emergency savings in a savings account along with living expenses for a year. You could keep another couple years’ worth of living expenses stored in accounts with fixed-income investments, such as certificates of deposit, treasury notes, and municipal bonds. From there, you could retain the rest of your long-term savings in your retirement or investment accounts.

Pro: This strategy may have less risk because you’ll have cash on hand and may not need to sell off stocks or tap into another account in the event of an emergency.
Pro: It can provide more confidence, knowing you’ll have certain assets and income sources set aside for anticipated future expenses.
Con: You may not have enough for the retirement you envision, especially if you’re overly allocated in conservative investments. With this, there’s also the risk you outlive your savings.

2. Dollar-plus-inflation

The “4% rule” is a popular example of the dollar-plus-inflation strategy. You withdraw 4% of your savings¹ the first year of retirement, and each year after you take out that same dollar amount plus an adjustment for inflation.

Pro: If your expenses won’t change much throughout retirement, this strategy seeks to enable you to cover your yearly costs for as long as the portfolio lasts.
Pro: It could be best for you if your main priority is maintaining a steady level of spending from year to year.
Con: This strategy ignores market conditions, so you could end up running out of money (in down markets) or spending much less than you can afford (in up markets).

3. Percentage-of-portfolio

This strategy calls for you to spend a fixed percentage of your portfolio every year.

Pro: It could make sense for you if your main concern is ensuring you don’t deplete your portfolio.
Con: This strategy results in yearly spending amounts that are completely market-driven and they could fall short of what you need to live.

4. Dynamic spending

This strategy combines the dollar-plus-inflation and percentage-of-portfolio strategies. You decide how much to withdraw from your investment portfolio each year, with an annual spending floor and ceiling to help you stay within an appropriate range. This allows you to adjust withdrawals based on market fluctuations, taking more in years when your investment returns are higher and less when they’re lower.

Pro: As your circumstances change, you have flexibility to adjust your withdrawal amount, which may help your money last through retirement.
Pro: Compared to the percentage-of-portfolio approach, with dynamic spending you are more likely to have stable income over time. That’s because the withdrawal amount doesn’t fluctuate as much year to year. The approach also seeks to protect the value of your initial investment in a down market.²

Note: When choosing a spending floor and ceiling, pay careful attention to the trade offs you’ll be making between maintaining your desired level of spending and preserving your portfolio to meet future goals.

To use dynamic spending, calculate the upcoming year’s spending by adjusting the amount of this year’s spending based on your portfolio return for the year. But you shouldn't go any higher than the “ceiling” or any lower than the “floor” you set as part of your strategy.

Tip: When choosing a withdrawal strategy, it’s important to consider taxes, life expectancy, additional income sources, and your investment portfolio. Learn more about these withdrawal strategies.

Find out more about making decisions in retirement.

Required minimum distributions

Once you reach age 73³ or retire, whichever is later, the IRS requires you to start taking a certain percentage out of your retirement savings accounts, including traditional IRAs and employer-sponsored plans such as 401(k)s. This is called your required minimum distribution (RMD).

Note: Roth IRAs aren’t currently subject to RMDs during the original owner’s lifetime. Designated Roth accounts in a 401(k) or 403(b) plan are subject to the RMD rules for 2022 and 2023. However, for 2024 and later years, RMDs are no longer required from designated Roth accounts.

For your first RMD, you can delay taking it until April 1 of the following year. Each subsequent year, you must take your RMD by December 31. Keep in mind, if you delay your initial RMD until April 1, you’ll be responsible for 2 withdrawals that year (one by April 1 and one by December 31), which could result in a larger tax liability.

You don’t have to spend your RMD

RMDs are designed to spread your retirement savings and related taxes over your lifetime. If you don’t depend on the money to satisfy your spending needs, you may want to consider:

Reinvesting your distributions in a taxable account to take advantage of continued growth. You may have an option to add beneficiaries to that account without passing along future RMDs to them. You may also want to speak with an advisor or tax professional about possible tax considerations.
Gifting to a qualified charity. The rules vary depending on if you’re using money in an IRA or an employer-sponsored retirement plan account. Consider speaking with an advisor on an approach that may suit your goals.

Tax penalty

Depending on the amount you’re required to take, the cost of missing an RMD can be significant. The IRS penalty for not taking an RMD, or for taking less than the required amount, can be up to 25% of the amount not taken on time.

Tip: To avoid a tax penalty, take the full amount each year on time. Speak with your tax adviser for more information. Learn about tax strategies.

Tax tips pre-RMD retirees should consider

When you’re over age 59½ and in your pre-RMD years, you have the flexibility to annually revisit how to minimize your taxes―both now and in the future. For example, if you have a large balance in a tax-deferred account—like a traditional IRA or 401(k)—and could face high RMDs in the future, you may benefit from:

Withdrawing those assets in the years leading up to RMD age. You’ll be accelerating some tax liability up front. But if your future account balance is lower, your future RMDs may also be lower.
Converting some of your traditional IRA assets to a Roth IRA. Roth IRAs aren’t subject to RMDs or taxes when you withdraw your assets in retirement (provided you’re at least 59½ and you’ve held the account for at least 5 years). Your employer-sponsored retirement plan may also allow you to convert to Roth in your plan, depending on your plan’s rules. Find out if a Roth conversion is right for you.

Spending roadblocks

You’ve chosen a spending strategy and are ready to start withdrawing your savings. But you may be experiencing a wide range of emotions that could be stopping you from enjoying the retirement you saved so long for. If so, you’re not alone.

DID YOU KNOW?

The vast majority of retirees still have at least 80% of their savings after two decades in retirement.⁴

Recognizing how these roadblocks can affect your spending may help you live your retirement dream guilt free.

Self-control

Some people may give more weight to spending and overindulging in the present. As a result, they don’t save enough for retirement. Others have a great deal of self-control when it comes to saving, which generally leaves them more than prepared for retirement. However, this discipline can lead to a sense of regret for not spending more on life’s pleasures.

Tip: If the idea of spending makes you anxious, focusing on how you’ll feel later if you don’t go on that vacation of a lifetime, for example, may make your decision a little easier.

Loss aversion

It’s natural to feel good about accumulating money and uneasy about losing it. Many investors have a personal attachment to their savings, so it’s not surprising that some people experience feelings of loss when making retirement withdrawals.

Tip: Think about your retirement fund withdrawals as paychecks to yourself instead of money you’re taking away from your savings. Instead of taking smaller monthly withdrawals, take out larger amounts on a quarterly, biannual, or annual basis. Setting that money aside in a separate spending account may help you feel less apprehensive about taking an RMD, or any distribution.

Scarcity and opportunity costs

Spending from what seems to be a fixed pool of non-replenishing resources can cause feelings of uneasiness and make you worry about “opportunity costs”—other ways you could be using your money or the trade-off of spending those resources today.

Tip: Think back to your goals and ask yourself why you invested in the first place. Was it for comfort, security, personal growth, quality time with loved ones? Remember, you worked hard to save for your unique goals. Spending in retirement can help you realize them.

Focusing on the long term and taking a disciplined approach to investing are part of Vanguard’s core investment principles. But if you’re in a good financial position, there comes a time when it’s okay to live out the retirement you planned for.

Your investment mix and market risk

Asset allocation is the way you divide your portfolio among stocks, bonds, and cash. Allocating your assets in a well-diversified way can reduce overall market risk to help meet your financial goals. Diversifying means having different types of investments. It doesn’t guarantee you’ll make a profit or that you won’t lose money.

As you approach and enter retirement, it’s important to invest in stocks but introduce more bonds and cash as you get older. Doing this can help manage short-term market volatility while also providing the growth potential necessary for a retirement that could last decades. Your specific allocation will depend on your risk tolerance and financial needs.

If you aren’t appropriately allocated for your retirement goals or risk tolerance, or if your allocation has drifted off course, now is a good time to think about how you might be able to adjust your portfolio to obtain a balance, which could help you navigate through a potential market downturn. Look to make investment changes within your workplace plan or IRAs, as changes will not result in a tax event. For gradual adjustments, consider taking future withdrawals from the asset class you'd like to decrease.

Learn more about investing in retirement.

¹Depending on your retirement and legacy goals, you many need to target a higher or lower withdrawal rate.

²Source: Guided Investor. May, 2020.

³Due to changes to federal law that took effect on January 1, 2023, the age at which you must begin taking RMDs differs depending on when you were born. If you reached age 72 on or before December 31, 2022, you were already required to take your RMD and must continue satisfying that requirement. However, if you had not yet reached age 72 by December 31, 2022, you must take your first RMD by April 1 of the year after you reached age 73.

⁴Source: CNN Business. October 2022.

Whenever you invest, there’s a chance you could lose the money.

Bond funds are made up of IOUs, primarily from companies or governments. These funds risk losing value if the debt isn’t repaid on time. Also, bond prices can drop when interest rates rise or the issuer’s reputation suffers.

Whether you keep your money where it is, move it to an IRA, or move it to another employer’s plan depends on your situation and preferences. Some things to consider are available investments and services, fees and expenses, and protection from creditors. Also consider withdrawal penalties, required distributions, and the tax effects of moving company stock to an IRA. There are other factors too. Weigh the pros and cons before you make your decision.

Please remember that all investments involve some risk. Be aware that fluctuations in the financial markets and other factors may cause declines in the value of your account. There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income. The information provided has not been personalized and is not intended to constitute investment advice.

Taxes: Taking money from your retirement account can affect how much you’ll have to pay in taxes. You’ll owe taxes on pre-tax money. You won’t owe taxes on Roth earnings as long as you are age 59½ or older and it’s been at least five years since your first Roth contribution. If required by law, Vanguard will withhold some taxes for you. You may need to pay a 10% federal penalty tax if you take money out early.

Vanguard does not provide tax advice. You should consult your tax advisor before making any decisions as to your specific circumstances.

Vanguard is not responsible for the accuracy of information on third-party sites. Vanguard receives no remuneration for website links.