5 Different Retirement Withdrawal Plans

A discussion of the pros and cons of five different oft-used retirement withdrawal plans

Christine Benz 19 July, 2012 | 5:21PM
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Despite copious amounts of information available about retirement planning, there is still a lot of confusion about the topic of retirement-plan withdrawals. Specifically, there is confusion surrounding fixed and variable withdrawals. This article will explain the pros and cons of different retirement withdrawal plans for those that are not taking the annuity route. The article will also explain some basic terminology.  

For starters, whether a payout is fixed or variable is really in the eye of the beholder: Taking out a fixed percentage of a portfolio per year results in varying amounts of pounds coming in the door, while taking out fixed pound amounts will mean that a retiree's withdrawals will vary on a percentage-of-portfolio basis.

Moreover, even though "safe withdrawal rate" has become a nearly ubiquitous term in retirement-planning circles, the "withdrawal" part of the phrase is something of a misnomer. As such, it tends to stir up unnecessary acrimony or, at the very least, confusion. Some income-oriented investors assume, not unreasonably, that "withdrawal" means that retirees steadily invade their capital until it's all gone, ignoring income-producing securities altogether. But the "withdrawal" in "safe withdrawal rate" generally assumes that retirees can be free-ranging in terms of where they go for cash, such as drawing income for living expenses from bonds or dividends, rebalancing proceeds, required minimum distributions, tax-loss sales, and yes, the outright selling of securities. In a similar vein, the term "income" also fans the flames of confusion. Are we talking about actual interest and dividend income, or income for living expenses from wherever we can scare it up? The term "distribution" is more encompassing than "withdrawal" or "income," but you don't see it used as much.

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About Author

Christine Benz

Christine Benz  is director of personal finance at Morningstar and author of 30-Minute Money Solutions: A Step-by-Step Guide to Managing Your Finances.