Retiring in 2027? Here's What Your First-Year Withdrawal Strategy Should Look Like.

If 2027 is your target retirement year, you may find yourself getting increasingly excited – and anxious – by the day. But one of the most important things you can so to set yourself up for a secure retirement is figure out a withdrawal strategy ahead of time.

Here’s how to establish a first-year withdrawal strategy that starts you off on the right foot.

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Estimate your spending needs

If you’re a year away from retirement, you should hopefully, at this point, have a good sense of what your bills will look like. This doesn’t mean you’ll be able to estimate your spending down the dollar. But you should be able to create a budget with rough estimates that at least get you into a spending range.

Figure out what income streams you’ll have

Your IRA or 401(k) may not be your only source of retirement income. Depending on your age, you may be eligible for Social Security if you retire in 2027. If you’ll be taking benefits right away, you shouldn’t have to withdraw as much from your savings to meet your spending needs.

Or, you may be planning to work part-time once you retire or consult in your former field. Add up your income outside of your retirement accounts to see what it amounts to, and then do the withdrawal math.

Let’s say you estimate your spending needs for your first year of retirement at $6,500 to $7,500 per month. If Social Security will pay you $2,500 a month, and you think you’ll earn $1,000 a month with part-time work, it means you’ll need to withdraw $3,000 to $4,000 from savings monthly to cover your costs.

Make sure your withdrawal rate is safe

Once you’ve run the numbers to see how much money you’re looking to withdraw from savings, you’ll need to make sure it’s a reasonably appropriate rate given your age and investment mix.

Let’s say in our example that you decide to withdraw $4,000 a month from your IRA or 401(k), or $48,000 a year. If you have $1.2 million in savings, that puts you at a 4% withdrawal rate, which may be reasonable if you’re retiring at a fairly typical age (say, sometime in your 60s) and your portfolio has a fairly mix of stocks and bonds.

But if you only have $900,000 in savings, $48,000 puts you at 5.33% withdrawal rate, which may be a bit high. At that point, you may want to revert to the lower end of your range. Withdrawing $3,000 a month, or $36,000 a year, puts you at 4% for a $900,000 nest egg, which is a lot safer.

Pay attention to how the market is doing

A market crash early on in retirement could be extremely detrimental to your savings. If you’re forced to lock in portfolio losses early, it could put you at a greater risk of depleting your nest egg in your lifetime.

For this reason, you need to pay attention to how the market is doing. If it’s down, a generally smart thing to do is reduce spending or beef up other income sources to minimize portfolio withdrawals. In our example, what you’d probably want to do is either reduce spending by 10% to 15%, or try to boost your part-time work or consulting hours to take pressure off of your nest egg.

Of course, this isn’t to say that you’re guaranteed to retire into a bad market next year. The point, rather, is that it’s generally best to be flexible when it comes to retirement plan withdrawals so that a poor market, especially early in retirement, doesn’t have to wreck your long-term plans.

Also, if you’re set on retiring in 2027, now’s a good time to move some assets into cash. You should ideally go in with a cash cushion large enough to cover about two years of living expenses. That allows you to leave your investments untouched during a prolonged market downturn.

A solid first-year withdrawal strategy could truly set the stage for a financially secure retirement. Look at your spending needs, income sources, and market conditions to land on the right approach. And remember, your strategy can evolve over time. But by getting things right at the start of retirement, you may be less likely to run out of money at the end of it.