title: Have an Intelligent Withdrawal Strategy description: [AFW S.2.8] Investment Principle #8 published: true date: 2026-06-30T08:09:08.015Z tags: editor: markdown dateCreated: 2021-06-02T22:35:41.928Z

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Watch AF MKOM 1625 - Intelligent Retirement Withdrawal Strategy VIDEO

"Never spend your money. Only spend the earnings generated by your money. (Only eat the eggs, not the goose)." -Michael Thomas

Two Types of Goals: Retirement vs Static¶

Read Nick's ATY 328 November 24 - Training for the Retirement Marathon PDF

Watch Two Types of Investment Goals: Retirement vs Static VIDEO

Retirement goals differ from all other financial goals in that retirement continues after the goal is met; possible for as long as 25 - 40 years. This has two consequences:

The time-horizon. The length of investing-time for non-retirement goals are from now until the goal date. Retirement, however, is from now and through retirement not to retirement. This affects the investment allocation. Imagine a college goal versus a retirement goal. The college goal is for 12-year-old and the retirement goal is for a 60-year-old looking to retire at age 65. Both have a similar time-to-goal, however they would have very different investment allocations. The retirement goal would be more "aggressive" because the actual investment time-horizon is over 30 years.
Withdrawal strategy. Withdrawing from retirement is in small increments over decades ("bleeding" the account). Whereas almost all other goals is a one-time lump-sum withdrawal.

Three Traditional Withdrawal Strategies¶

There are three traidtional withdrawal stategies that fit into our 100%-equity philosophies. We will, however, combine them into our own, but first let's take a look at them separately:

1: Nick's 100% Equities with a Side-Fund¶

Watch AF MKOM 1637 - Client Inherited $300k. Now What? VIDEO

Readers of my books and NMI know that I espouse a kind of standard, simple, even bonehead withdrawal protocol in retirement. In general, it’s: 1. Put two years’ living expenses in a money market fund, essentially to mitigate sequence of returns risk. 1. Put everything else in a very broadly diversified equity portfolio, and draw 4.5% from it, escalating the dollar withdrawal at 3% per year to roughly offset inflation. 1. If you don’t start tapping into your side fund until your equity account is already down meaningfully (say 25%), and then live on it for two years, historically the market will already be recovering by leaps and bounds when the side fund runs out. 1. When the equities are back up to the level before you started, stop withdrawing from the Side Fund and re-start withdrawing from the equities. 1. Start replenishing the side-fund. Rinse and repeat. - So, as I suggested a moment ago, that would be the time for all the people in the room to act like grownups and make what may be some difficult decisions. These would include, but certainly not be limited to: (a) scaling back your lifestyle for a while, and/or (b) going back to work for a while, and/or © selling something, and/or (d) borrowing.

-Nick Murray, 2018 May NMI Newsletter

Read Nick's ATY 156 June 05 - Our Standard Withdrawal Strategy PDF

Read Nick's ATY 157 June 06 - These Are Guidelines, Not Rules PDF

Read Nick's ATY 158 June 07 - When to Access the Side Fund PDF

Read Nick's ATY 159 June 08 - Agreeing on the Number PDF

Read Nick's ATY 160 June 09 - Strategizing the Move to the Side Fund PDF

Read Nick's ATY 161 June 10 - Replenishing the Side Fund: Thought Process PDF

Read Nick's ATY 162 June 11 - Replenishing the Side Fund: Methodology PDF

Read Nick's ATY 163 June 12 - What If 2 Years Aren't Enough PDF

Read Nick's ATY 164 June 13 - Equity Withdrawal is for Grownups PDF

Read Nick's NMS 10 - Equity-based distribution phase PDF

Read Nick's NMS 14 - The withdrawal protocol PDF

Read Nick's NMS 65 - Can't follow the way you got to the capital sum we need at retirement.Is there a short version? PDF

Read Nick's NMS 66 - What if two year's living expenses in cash isn't enough? PDF

Read Nick's NMS 67 - When and how does one reload the side fund? PDF

Read Nick's This Time Isn’t Different - #37 - Addendum 2 - Managing Sequence of Return Risk PDF

Nick's Investment Policy Statement on the Withdrawal Stage¶

(click to enlarge)

2: Variable Annuity with a Guaranteed Income Rider, invested in 100% equities.¶

I know of only two ways of coping with equity volatility:

Abiding faith in the historical record, in the greatness of free-market democratic capitalism.

The other method is what the variable annuity industry is pleased to call “living benefits.

Read Nick's On Panic, Faith, and the Determined Primitive PDF

Watch Intelligent Withdrawal Strategies by Andreas Reiter VIDEO

Watch American Funds VA illustration by Dave McDanal VIDEO

Visit the Capital Group / American Funds Portfolio Reliance Calculator.

3: Sinking Fund¶

Use this when the client doesn't have enough assets that when withdrawing 5% is not enough to live off of.

The Intelligent Retirement Withdrawal Strategy¶

This is our preferred hybrid strategy that combines elements of 100%-equites and a variable annuity, without using a side fund. Note: your client should still have an emergency fund / "war chest".

Phase 1: Income from guaranteed sources such as Social Security and Pensions.
Phase 2: Income from insured sources, such as a Variable Annuity. The minimum amount the client needs to survive should come from phase 1 & 2.
Phase 3: Income from mutual funds invested in the World's Great Companies and is considered "lifestyle" income. Continue taking income until the market drops ~20%, at which point the client stops taking income and lives off of Phase 1 & 2. When the mutual funds grow back to the level before the drop then resume taking income.

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text-align: left;"><div xmlns="http://www.w3.org/1999/xhtml" style="display: flex; align-items: unsafe center; justify-content: unsafe center; width: 308px; height: 1px; padding-top: 130px; margin-left: 309px;"><div data-drawio-colors="color: rgb(0, 0, 0); " style="box-sizing: border-box; font-size: 0px; text-align: center;"><div style="display: inline-block; font-size: 19px; font-family: Helvetica; color: rgb(0, 0, 0); line-height: 1.2; pointer-events: all; white-space: normal; overflow-wrap: normal;"><b>Lifestyle Income</b><br style="font-size: 19px" />100% Equity Portfolio<br style="font-size: 19px" />Mutual Funds</div></div></div></foreignObject><text x="463" y="136" fill="rgb(0, 0, 0)" font-family="&quot;Helvetica&quot;" font-size="19px" text-anchor="middle">Lifestyle Income...</text></switch></g></g></g><g data-cell-id="6"><g><rect x="308" y="162" width="310" height="120" fill="none" stroke="none" pointer-events="all"/></g><g><g transform="translate(-0.5 -0.5)"><switch><foreignObject pointer-events="none" width="100%" height="100%" requiredFeatures="http://www.w3.org/TR/SVG11/feature#Extensibility" style="overflow: visible; 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Then stop. Resume once account value builds back up.</div></div></div></foreignObject><text x="53" y="65" fill="rgb(0, 0, 0)" font-family="&quot;Helvetica&quot;" font-size="18px">Take income until the market dr...</text></switch></g></g></g><g data-cell-id="20"><g><rect x="0" y="231" width="179.5" height="60" fill="none" stroke="none" pointer-events="all"/></g><g><g transform="translate(-0.5 -0.5)"><switch><foreignObject pointer-events="none" width="100%" height="100%" requiredFeatures="http://www.w3.org/TR/SVG11/feature#Extensibility" style="overflow: visible; text-align: left;"><div xmlns="http://www.w3.org/1999/xhtml" style="display: flex; align-items: unsafe center; justify-content: unsafe flex-start; width: 178px; height: 1px; padding-top: 261px; margin-left: 2px;"><div data-drawio-colors="color: rgb(0, 0, 0); " style="box-sizing: border-box; font-size: 0px; text-align: left;"><div style="display: inline-block; font-size: 18px; font-family: Helvetica; color: rgb(0, 0, 0); line-height: 1.2; pointer-events: all; white-space: normal; overflow-wrap: normal;"><div><div>The minimum you need to “survive” should come from these two sources.</div></div></div></div></div></foreignObject><text x="2" y="266" fill="rgb(0, 0, 0)" font-family="&quot;Helvetica&quot;" font-size="18px">The minimum you need...</text></switch></g></g></g></g></g></g><switch><g requiredFeatures="http://www.w3.org/TR/SVG11/feature#Extensibility"/><a transform="translate(0,-5)" xlink:href="https://www.drawio.com/doc/faq/svg-export-text-problems" target="_blank"><text text-anchor="middle" font-size="10px" x="50%" y="100%">Text is not SVG - cannot display</text></a></switch></svg>

Phase 1: Guaranteed Income(s)¶

This includes social securit and pensions.
Caveat: the income for the surviving spouse is not always equal to what it was while both spouse were living.

Which Accounts to Spend Down First in Retirement?¶

Read the Which Accounts to Spend Down First in Retirement? 4 Tips ARTICLE

Idea #1 - Try to Stay in the 15% tax-bracket¶

Make efforts to remain in the 15% federal income tax bracket as long as possible (or the lowest bracket you possibly can). Here are two reasons why:

There’s a big jump between the 15% rate and the next bracket (25%).
Investors in this bracket can potentially qualify for a 0% federal tax rate on qualified dividends and long-term capital gains.

The biggest obstacle to remaining in the 15% bracket is RMDs, which can force you into a higher tax bracket if IRA growth is left unchecked. Therefore, some investors might want to consider making IRA distributions in early retirement up to the top of the 15% tax bracket. A similar but potentially more powerful alternative is to convert this same amount into a Roth IRA, assuming you can live off of taxable assets in the meantime (and you can pay the tax bill for the conversion).

Idea #2 - Use Your Roth IRA¶

Many people never touch their Roth IRAs during their lifetimes because they (mistakenly) don’t want to "squander" this account. Well, what’s the point of having a Roth IRA if you’re not going to use it?

One powerful way to use your Roth IRA is in conjunction with your other tax planning. For example, if you’re looking to sell an appreciated position, covering some of your living expenses through Roth IRA withdrawals instead might allow you to qualify for the aforementioned 0% rate on that gain.

Another strategy is to tap your Roth IRA during your highest income tax years to avoid reaching an even higher tax bracket. For example, if RMDs push you to the top of the 15% tax bracket, consider covering your remaining expenses from Roth IRA withdrawals, allowing you to avoid the 25% tax rate.

College Withdrawal Strategies¶

Read Nick's ATY 153 June 02 - Withdrawing for College PDF

Truthfully, I keep it simple. I just use the American Funds College Target-Date funds.