Retirees Get a 401k Withdrawal Headache

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Different people, different strategies.

Myra Hindus and Jewell Jackson
Myra Hindus and Jewell Jackson

Myra Hindus of Boston, semi-retired at 68, had her financial adviser estimate the 401(k) withdrawals necessary to support her $4,500 monthly budget, which the adviser also prescribed. But Hindus isn’t fully at ease about her finances, despite the professional advice, a paid-off mortgage, and a good bit more savings than most people have.

“It’s a bunch of guesswork,” said the former diversity administrator and consultant to major universities who hedges her bets by teaching college social work courses.

What overwhelms her are the many unknowns that will determine whether her money lasts as long as she does. What if her adviser is wrong? Or what if she lives well into her 90s – like her mother did? She’s also uncertain of the impact of her younger partner’s coming retirement, which isn’t sorted out yet.

“No one knows when you’re going to die so you can’t base it on that. We’re all in the stock market, and we don’t know what will happen to that,” she said.

Brian Jarvis and Connie O'Brien
Brian Jarvis and Connie O’Brien

Brian Jarvis and Connie O’Brien of Beavercreek, Ohio, also have advantages most baby boomers don’t: small pensions from their former employer, Northrop Grumman, and a mortgage paid off with their private-sector salaries. But they got lucky too. The odds that their withdrawal strategy would succeed improved a few months after they retired, in 2010, when President Obama signed the Affordable Care Act.  The couple, who are too young for Medicare, no longer had to buy expensive private health insurance – access to the government health exchange drastically reduced the expense.

Jarvis feels confident they will continue to be able to fund their $55,000 yearly budget for groceries, dinner with friends, taxes, utilities, vacations, and trash pickup. The predictability of these expenses dictates the withdrawal strategy. “Take out what we need” and no more, he said.

Wrestling with how much to spend is a good problem to have. And although the well-laid plans in the Hindus and Jarvis households could still be derailed by unanticipated events, at least they have a plan – and savings to worry about. More than half of boomers approaching retirement have no money in a 401(k).

For those who do have savings, paralysis is the more common reaction. Much is at stake for the typical boomer household with a 401(k), who has accumulated just $135,000 in their 401(k) and IRA accounts combined. Is this even enough money to support their same standard of living after retiring? If deciding how much of the 401(k) to spend and how fast can be a headache for people in good financial shape, it’s a migraine for boomers with less.

Miscalculations can wreak havoc on retirement finances too. And not many people can do the complex calculations required to find an optimal rate of withdrawal. There’s also the possibility of a devastating event that’s impossible to predict: after the 2008 stock market crash, boomers who’d planned to retire in a few years watched helplessly as a third of their stock nest eggs were wiped out.

One solution to these myriad issues is using retirement savings to buy an annuity, which guarantees a set amount of monthly income for life – but few do it.

To preserve their finite resources, retirement experts recommend that boomers planning their retirement use the strategies that the two households profiled here are using. (Full disclosure: Hindus is a friend of this blogger.)

  • Track spending and review sources of retirement income. The first step, before retiring, is getting an accurate estimate of how much will be required to maintain one’s standard of living into retirement. The second step is calculating whether income from savings plus Social Security and perhaps a pension will be enough to pay basic expenses.
  • Delay Social Security. A monthly Social Security check grows a whopping 76 percent for people who wait to sign up for their benefits at age 70, rather than 62, the earliest age of eligibility. Benefits also increase incrementally for each year they’re postponed. One option is to work longer before filing for Social Security.  Both Hindus and Jarvis decided on a different strategy, albeit one that is unaffordable for most retirees: retire and live off of savings for a few years in order to delay Social Security. Hindus postponed her benefits until last year, after turning 68; Jarvis and O’Brien, 63, will wait until their late 60s.
  • Carefully plan a withdrawal strategy. Ad hoc or reactive 401(k) withdrawals can get retirees into trouble. Many financial advisers recommend the 4-percent rule of thumb for withdrawals. Retirees have decent odds that their money will last if they withdraw an annual amount equal to 4 percent of their initial account balance at retirement, adjusted for inflation.

These steps won’t eliminate the uncertainties but they should reduce the guesswork.

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Ken Pidcock

I’m repeating myself, but if you plan to delay Social Security by living entirely off of savings between when you retire and age 70, you might want to consider annuitizing that amount. If you run into an unfavorable sequence of returns during that time, you’re not going to want to have to draw down a portfolio at a rate required to pay all of your expenses. An alternative, if you’re in a 401(k), is to transfer the amount necessary to get you from retirement to 70 to a stable value fund. That way, you still have liquidity if that’s important to you.


    Ken –> Yes, those are all very good considerations that need to be taken into account.
    A number of circumstances played to our advantage, besides the start of the ACA (as mentioned in the article). We did consider the possibility of sequence of returns, but given that the market had just undergone a very significant correction, and the government was taking extraordinary means to stabilize it, we felt that was a reasonable risk we could take. (As it turns out, the market has performed quite well these past eight years – but we fully realize it could have gone the other way.) Also, in anticipation of retiring in a few years, we had reduced our equity exposure to a more conservative level a year prior to the market correction. As a result, when the Dow dropped, our portfolios were impacted minimally, which the market more than made up rather quickly.

    Since we consider our future Social Security income to be our annuity, we have not considered annuitizing anything else. Our investments have performed well – net of our spending, our portfolios are larger than they were at the time of our retirement in 2010. We’re constantly debating when the right time will be to claim our Social Security benefits – which we can start at anytime, should some unfavorable event occur.

    At retirement, we transferred both our 401(k)s to our self-managed IRAs. We’re now invested quite conservatively, we have liquidity, and feel that we can weather most any storm.

    Jeff Bailey

    For those wary of annuities (and they should be) and advisors and others dealing with that wariness, an article from UCLA Anderson Review:


Thanks for the blog post Kim. I do wish authors discussing these issues would not reflexively promote delaying Social Security. IMO, this is not a cut and dried option, as many people are forced to retire early and need Social Security to survive. When a retiree has a timing choice, health and family longevity should be analyzed, prior to a claiming decision. In addition, married couples should explore survivor and spousal benefits, as these can affect claiming strategies. While many people will benefit by delaying, the constant drumbeat for delay may misinform, dissuading those who might be better off claiming sooner.

I agree with the statement “Carefully plan a withdrawal strategy,” but I would add the phrase, and update the plan regularly. Bill Bengen’s 4% rule is not a practical recommendation. It is tremendously important academic research and a discussion starter. Mr. Bengen has updated his research and the rule is now 4.5% from tax advantaged accounts and 4.1% from taxable accounts. The rule exists in the context of a very specific set of criteria: 30 year time horizon, approximately 35%-75% equity allocation, retiree expenses and other income increase with the inflation rate. Even if a retiree could meet this criteria exactly, other factors will have a major effect, e.g., tax rates and efficiency, actual expenses, rebalancing efficacy, legacy desires, other sources of income, etc. For these reasons and with no intent to discount Mr. Bengen’s seminal research, to the extent a retiree has the resources, a dynamic withdrawal strategy is better and is supported by recent academic research. No withdrawal strategy can completely ameliorate truly catastrophic, long-tail events, but withdrawal flexibility may reduce the impact of a negative event that is not extreme.

I do not feel it is possible to “reduce the guesswork.” At best, the retirement financial process is stochastic and at worst it is chaotic. Regular, ongoing, educated guesswork describes the process of retirement financial management, from the day we start planning (hopefully at a young age) till the day we die. Thanks again for promoting thought and discussion on this important topic.


Taxes are an important component in withdrawal of retirement income. It’s not how much you have, but how much of it you get to keep.

The combination of IRA/401k withdrawals and Social Security, as well as other investment income can nudge you into another tax bracket. Some people have a higher income in retirement than in their working years. And Social Security income can be taxed as high as 85% depending on other income. Tax free income is also included in the calculation to arrive at how much is taxable. The government giveth, but likes to claw back as much as possible.

The best laid plans of mice and men often go awry. That said, prudent planning and research is the key to a secure retirement. We can only do our best and hope that our diligence rewards us.

    Ken Pidcock

    I hope I’m not referring to you, but I have a hard time sympathizing with those who end up in a higher tax bracket in retirement. It means they put too much into a qualified plan, depriving The People of tax revenue while they were working. If they have to pay for that now, so be it.


      Ken…there are many reasons people can wind up in a higher tax bracket and not just because they contributed a lot to a qualified retirement plan. Those who wait to collect Social Security until they reach 70 will also, soon thereafter, have to deal with RMDs from IRAs if they have not elected to start taking distributions earlier.

      On the contrary, I do not expect sympathy for those who have worked hard and sacrificed and saved so they would not become a burden on society. I applaud them. In many instances they only deprived themselves, not “the people.”

      I was merely pointing out that a little knowledge of taxes can be a great benefit in calculating retirement account withdrawals and give one a better overall picture of their financial future.


        Plus, if you look at the 2018 tax bracket thresholds (for filing MFJ) — $19,050, $77,400, $165,000, $315,000… — it’s not easy to just be “nudged” into a higher tax bracket. And, if there is some concern about moving into the next tax bracket, there are always methods like DIAs (QLACs) to defer IRA income until many years later and thereby push one’s taxable income (and tax liability) down.

        The numbers also show that even if waiting until 70y/o for Social Security while dealing with RMDs from IRAs, the total income from those two sources rises much faster than the tax liability does, so it’s still the winning choice to make.


          Brian, bear in mind these are marginal tax brackets. You pay 10% on the first $19,050, 12% on the amount up to $77,400.
          If you make $80,000, you will pay additional taxes on the $2,600. Or 22% on the amount over $77,400. There is a big difference between 12% and 22%. These tax rates are for married filing jointly, or qualifying widow(er). The rates for other filing categories are different.

          We seem to agree with everything else, so don’t know what the brouhaha is about and I do agree with your previous comment about Social Security being our annuity. You seem to have a pretty good handle on your situation.


    Marjorie –> There’s no question that even the best plans can go awry. On the other hand, the best plans can also work out better than expected.

    First, through careful tax-efficient withdrawals from diversified investments, (so far) we’ve found that not to be a problem – we’ve been able to keep our AGI much lower than it was during our working years. We’re still spending the same amount of money, but we’re pulling it from various investment sources in order to control our AGI.

    Second (as mentioned in the article above), while retiring early, we’ve been able to avoid expensive health insurance premiums by tax-efficiently withdrawing from our investments and thereby qualifying for subsidized health insurance from the ACA. The medical networks are reasonable in this region, so that’s worked out to our benefit. We’ll be Medicare-eligible in a couple of years, so this effort should go away soon.

    Third, regarding being nudged into a higher tax bracket –> the Tax Cuts and Jobs Act of 2017 that was recently passed, lowers the tax rates and adjusts the tax brackets such that with continued tax-efficient withdrawals, we’re less likely to get nudged into a higher tax bracket than we were previously. And since our current plans aren’t to claim Social Security for a few more years, we’ll continue withdrawing from our IRAs – just enough to encroach upon that next tax bracket, but not go over it – which will then free-up additional cash to continue tax-efficient withdrawals in future years (when we’ll have to start making RMDs).

    And that’s the balance this game requires playing – continuously researching, planning, and executing…in order to keep as much as possible while minimizing our tax liability to the government.


    “Social Security income can be taxed as high as 85% depending on other income.” I don’t think this statement is correct. It is true that 85% of Social Security income can be “taxable” for people but the tax rate on that 85% income figure will be much lower than 85%. The tax rate will be whatever the marginal tax rate is on the overall income of that person.


      I don’t think anyone believes their Social Security benefits are taxed at a rate of 85%. Otherwise you would only keep 15% of your benefits. That would be ridiculous.


        P.S. Tax rates only go as high as 37% anyway. I’m sorry you grossly misinterpreted my statement.

          Bill Parker

          I am afraid I also “grossly misinterpreted” that phrase at first. And, as a tax CPA, the phrase “that would be ridiculous” pretty much describes many of the consequences of our tax code, so…


      I think what the author was intending to convey is up to 85% of your Social Security income will be subject to what ever tax rate you are in. IE, you may have to pay income tax on some portion of your Social Security income depending on age and income.

Wise Money Tips

It’s definitely not an exact science. No one has a crystal ball. You don’t know how long you will live, what the markets will do, etc. But you plan for the worst and expect the best. Assume you will live into your nineties. Expect the stock market to be volatile. Save as much as possible before retirement. The 4% rule is indeed very useful. This article by William Bengen is a very interesting read.

Wise Money Tips

It’s definitely not an exact science. No one has a crystal ball. You don’t know how long you will live, what the markets will do, etc. But you plan for the worst and expect the best. Assume you will live into your nineties. Expect the stock market to be volatile. Save as much as possible before retirement. The 4% rule is indeed very useful. This article by William Bengen is a very interesting read.


    What we found was that our investment decumulation phase in retirement is no more of an exact/inexact science than was our investment accumulation phase while we were working. No crystal ball; no guarantees; unsure what the markets would do; etc., just mathematical projections with multiple variables.

    That’s a very interesting article by Bengen. We had lowered our equity exposure to 25%; but that article certainly provides food for thought – perhaps a 50/50 mix might be preferable. We will consider it. (So far through 8 years of retirement, our annual withdrawal rate has ranged between a comfortable 3.15% – 3.50%.)


Naturally every situation is different, but delaying Social Security is a trade-off with evaluating your health and our eventual demise. I’m aware that each year we hold off returns an 8% increase, but do the math and see where that crosses over to a good decision – often in the mid-80s. Heirs can receive your retirement monies, but no one is getting your future monthly Social Security payout after you have spent down some chunk of retirement savings to gain a higher monthly Social Security payment.

    Ken Pidcock

    The observation that we are more likely than not to collect fewer benefits by delaying, since the crossover is past average life expectancy, is the strongest argument against delaying. The strongest argument for delaying is that, if you are planning for a 30 year retirement, which is considered prudent, delaying will allow you to confidently spend more in retirement than you would otherwise. Illustration: Suppose you retire at 64 when you are due a $20K annual Social Security retirement benefit. If you delay until 70, that would be around $30K. So, if you use retirement savings to delay the benefit, you can easily purchase six years of $30K income, with COLA, for less than $200K. Doing that, you guarantee $30K annual retirement income, in addition to income from other sources, from the day you retire until the day you die, no matter when that is. (Which, of course, may be 65, but we’re talking about prudent planning here.) Now, if instead you take the $20K benefit at 64, getting to $30K with that $200K in retirement savings will require an initial drawdown of 5%, and you cannot be confident with that strategy lasting thirty years. Caveats: (1) Of course, you may die young and, as you say, deny your heirs the money you spent to delay. (2) Following the second strategy, you may experience a really good sequence of returns on your retirement savings, finding yourself at 94 with more than the original $200K and thumbing your nose at those idiots who delayed their Social Security benefit.


      We also can’t overlook that withdrawing funds in lieu if receiving SS benefits also reduces that wonderful 8th Wonder of the World as Einstein called it – compound interest.

      I typically do whatever my wife tells me to anyway. Reduces stress, hoping it helps me live longer 😀


    In my situation, I took Social Security at age 63½, and therefore drawing less from my retirement savings. My break even point is at age 86, assuming the markets cooperate. Taking less from your investments mitigates the sequence of portfolio bad returns that might occur early in retirement.

    Sequence-of-returns risk involves the actual order in which investment returns occur. Typically, negative returns earlier in retirement have a more severe impact on your portfolio than negative returns later in retirement. That’s because your portfolio’s value is reduced by both negative market performance and any withdrawals you take to fund your day-to-day expenses. This means that a smaller amount is left behind to experience any potential future growth.


      A thought-provoking hypothesis Monty that is worth further investigation. If one has the financial ability to delay Social Security, exploring the likelihood of an adverse sequence of returns makes a great deal of sense. Although we cannot predict future performance with assurance, there appears to be strong correlation between high CAPE10 values and reduced market performance, over the subsequent 15 years. I am not sure how an analysis would turn out, but it would be an interesting exercise.

      There are many reasons to consider early or delayed claiming approaches, but your insightful comment provides an additional criteria to consider. For those interested in CAPE10 correlation exploration, here is a well considered by Michael Kitces:

      Excellent post!

Michael Waggoner

Whatever system of withdrawals one plans for ones tax-favored accounts, it will be a good idea to build up a shock absorber or cushion of one to three years of living expenses in cash. One would make regular transfers from ones long-term investments to the cushion fund (perhaps 0.3% or more monthly), starting a while before retirement. Then make withdrawals from this cushion fund (perhaps 2-3% monthly). The cushion fund allows one to smooth out fluctuations in stock and bond prices.

A sensible withdrawal system would be the Required Minimum Distributions required for many federally-tax-flavored retirement savings.


As to delaying claiming Social Security, couples should consider delaying at least one of them, preferably the larger payment. (Those born before 1954 can file a restricted application for spousal benefits, letting their own Social Security payment grow.)

That way, when one sadly passes on, the surviving spouse will be left with the larger of the Social Security benefits.


    This is a wonderful way for a couple to maximize benefits. The spouse delaying benefits must be at full retirement age before applying for spousal benefits.

Mike Mas.

My wife is a few years older than me, and is now on Medicare. We are delaying her claiming Social Security because it would raise our household income to the point where I would lose my ACA subsidy. Will try to wait until I reach Medicare age before she claims Social Security benefits. Hate to be that way, but we didn’t write the rules. Thanks.

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