You're Probably Withdrawing From Your Retirement Savings All Wrong. Here's How to Fix It.

One of the biggest fears retirees commonly face is running out of money. After decades of saving and investing, the last thing anyone wants is to watch their retirement savings shrink before their eyes. That's why it's important to have a well-thought-out withdrawal strategy.

But the strategy a lot of retirees use to manage their savings misses the mark on one key point. And if you stick to a common rule, you may be at a greater risk of depleting your nest egg in your lifetime.

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Why fixed retirement plan withdrawals can create problems

A lot of people take the following approach to withdrawing from an IRA or 401(k):

• Establish an initial withdrawal rate (often 4%, though that's just one guideline).
• Adjust that withdrawal for inflation annually.
• Stick to that plan through thick and thin.

The problem is that this strategy becomes risky when markets don't cooperate -- especially if there's a market downturn early on in retirement.

If your portfolio loses a fair amount of value but you continue withdrawing at the same rate without making adjustments, you'll have fewer assets left to recover when the market rebounds. Over time, that could strain your portfolio and push you closer to depletion, especially if you live longer than expected.

Imagine you retire with $1 million and decide to follow the famous 4% rule. In that case, you're withdrawing $40,000 a year from your savings plus adjustments to account for inflation.

But let's say, early in retirement, the market crashes, your portfolio shrinks to $800,000, and it takes several years to recover. If you continue to pull $40,000 a year out of your savings, you're withdrawing a larger percentage of your remaining assets. That makes it tougher for your portfolio to recoup those losses.

A flexible strategy could help your money last longer

Instead of sticking to a fixed withdrawal amount regardless of market conditions, it pays to take a more flexible approach to your retirement nest egg. That could mean reducing spending and withdrawals when the market is down and increasing withdrawals when the market is up.

Neither behavior has to be extreme, though. You don't necessarily have to slash your spending by 40% because of a market decline. And you shouldn't necessarily withdraw double what you'd normally take out because the market is having a good year.

But with modest tweaks, you can make it easier for your portfolio to recover from negative market events. Over time, that could spell the difference between running out of money or not.

Cash reserves are crucial, too

In addition to being flexible with retirement plan withdrawals, it helps to have a solid cash cushion. That way, you can simply pay for expenses using cash if the market is down and it's a bad time to liquidate investments.

The amount of cash you maintain should hinge on your spending, non-portfolio income, and what you need for peace of mind. A good range is one to three years' worth of living expenses. If you have larger Social Security benefits that cover a good chunk of your essential bills, you may feel more comfortable sticking with the lower end of that spectrum.

It's important to enjoy the money you've saved for retirement and not be afraid to spend it. At the same time, it's a good idea to stay vigilant and adjust your plans when the market is down. Sticking to a fixed withdrawal strategy could hurt you in the long run, so it pays to be flexible if you want to improve the odds of your savings lasting as long as they need to.

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