3 strategies to planning retirement distributions

There are two factors that can determine whether you’ll have a comfortable retirement: The amount of money you’ve saved and how quickly you spend that nest egg after you retire. The rate of annual withdrawals from personal savings and investments helps determine how long those assets will last and whether the assets may be able to generate a sustainable stream of income over the course of retirement.

A number of factors will influence your choice of annual withdrawal rates from accounts such as a workplace retirement plan or Discover^® IRA Accounts. The following are three key considerations:

Consideration 1: Your Age and Health

As you think about what your withdrawal rate should be, begin by considering your age and health. Although you can’t predict for certain how long you will live, you can make an estimate. However, it may not be wise to base your estimate on average life expectancy for your age and sex, particularly if you are healthy. The average life expectancy in the United States has fluctuated over the years.

Consideration 2: Inflation

Inflation is the tendency for prices to increase over time. Keep in mind that inflation not only raises the future cost of goods and services, but also affects the value of assets set aside to meet those costs. To account for the impact of inflation, include an annual percentage increase in your retirement income plan.

How much inflation should you plan for? According to Bankrate, between 1986 and 2020, the average annual U.S. inflation rate was about 2.5%. But consumer prices rose 4.2% in 2021, the largest increase in more than a decade. So, for long-term planning purposes, you may want to assume that inflation would average in the range of 3% to 4% a year.

If, however, inflation flares up after you have retired, you may need to adjust your withdrawal rate to reflect the impact of higher inflation on both your expenses and investment returns. Also, once you retire you should assess your investment portfolio regularly to ensure that it continues to generate income that will at least keep pace with inflation.

If it looks like you could face a shortfall down the road, try to contribute as much as possible to tax-advantaged retirement accounts while you’re still working, such as Discover IRA CDs and your workplace retirement plan. With Discover IRA CDs, you get competitive rates, guaranteed returns, and flexible terms. On top of that, you have the choice of opening either a Roth IRA or Traditional IRA.

Consideration 3: Variability of Investment Returns

When considering how much your investments may earn over the course of your retirement, you might think you could base assumptions on historical stock market averages, as you may have done when projecting how many years you needed to reach your retirement savings goal. But once you start taking income from your portfolio, you no longer have the luxury of time to recover from possible market losses.

For example, if a portfolio worth $250,000 incurred successive annual declines of 12% and 7%, its value would be reduced to $204,600, and it would require a gain of nearly 23% the next year to restore its value to $250,000¹.  When a retiree’s need for annual withdrawals is added to poor performance, the result can be a much earlier depletion of assets than would have occurred if the portfolio returns had increased steadily. While it’s possible that your portfolio will not experience any losses and will even grow to generate more income than you expected, it’s safer to assume some setbacks will occur.

Your financial professional can help you determine a withdrawal strategy for each of your retirement accounts that can minimize the drain on your portfolio. You can also turn to Discover for solutions to additional savings goals. For example, the Discover IRA Savings Account allows for flexible contributions and provides a place for you to transfer your maturing IRA CD without locking in a term. Discover’s high-yield Online Savings Account and Money Market Accounts can also help you prepare for expenses that might arise between now and retirement. In the long run, that could help protect your retirement security.

Discover

Regardless of your time horizon, risk tolerance, or savings goal, you can find the right savings vehicle for your needs at Discover. Open a Discover account online or call our 24/7, U.S.-based, live customer service at 1-800-347-7000.²

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Note: The article and information provided herein are for informational purposes only and are not intended as a substitute for professional advice.

¹ Example is hypothetical and for illustrative purposes only. Your results will vary.

² You can reach a live agent any time by calling 1-800-347-7000. Certain specialized customer service agents may not be available 24/7.