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This content was contributed by Manulife Investment Management (Singapore) Pte. Ltd

Your retirement withdrawal strategy—four tips for managing inflation

12 April 2024 | 4 mins-read

It is widely known that investors should start planning for retirement as early as possible. When it is time, after decades of accumulation, to decide how you'll turn these hard-earned savings into income and enjoy what you've always dreamed of doing, the planning doesn't end there. It's important to regularly review your withdrawal strategy and make adjustments as needed to keep changing economic conditions—especially inflation—from throwing you off track.

Are rising prices affecting your drawdown strategy?

Your cash flow is one of the first things you should check. When prices go up, your money doesn't go as far as it used to, which means your retirement savings may not last as long as you planned. To see how inflation could be affecting your cash flow, update your budget to reflect the higher costs, then compare your total expenses to your monthly income. If your income is more than your expenses, your current withdrawal strategy is probably fine—but you should still review it annually. If your expenses are more than your income, you may need to take action to either cut your expenses or increase your income.

Managing the inflation effect

Consider these four actions to help keep inflation from depleting your retirement savings sooner than you expected.

1. Take a closer look at your budget

Lowering your expenses is probably the easiest way to help stretch your retirement dollars. For example, you might be able to save money by switching to a lower-cost mobile phone, internet, or cable provider that offers comparable services. Cutting back on nonessential items, such as entertainment, can also help.

2. Model different withdrawal scenarios

There are many ways to turn your retirement savings into income, and some could eat up your money faster than others, especially during periods of high inflation. Modeling different drawdown strategies, such as the ones listed below, can help you decide if your current approach is still the best one to help preserve your retirement income and lifestyle.

The 4% rule—Under this approach, you withdraw 4% from your retirement account each year. The 4% is a general guideline; you should choose a percentage that will help you cover your current expenses while making sure you’ll have enough money to last for your projected retirement. If you use this approach, consider adjusting the percentage each year for inflation to help ensure you can meet your monthly expenses—keeping in mind that the more you take out, the faster your savings may be depleted.

A fixed dollar amount—This approach is similar to the 4% rule, except you withdraw the same dollar amount each year from your retirement account. And like the 4% rule, if you use this withdrawal strategy, you may have to increase the dollar amount to account for inflation.

Interest-only withdrawals—With this strategy, you only take out the interest and dividends that your investments earn each year. Your principal stays invested, which means your savings still has the potential to grow. The main drawbacks are that the amount you receive may vary from year to year and it may not be enough to cover living expenses. Before going this route, you’ll want to review the investments in your portfolio to determine how much income they may generate.

Buckets drawdown strategy—While this approach is the most time consuming of the four, it does offer you a sense of control over your investments. In bucket one, you generally put in enough cash to cover three to five years of living expenses. Bucket two is usually for fixed-income investments (bond funds), and bucket three is typically for your stock funds. Your withdrawals will come from bucket one, and you can replenish it with the interest and dividends from buckets two and three.

Remember, you don't have to choose just one strategy. After modeling different scenarios, you might decide that using a combination is the way to go to help you make the most of your retirement income. You might also consider contacting a financial professional to help you run the scenarios and to make sure you factor in other sources of income such as Social Security and investments in nonretirement accounts.

3. Review your current mix of stocks and bonds

Inflation can erode the value of your money and your purchasing power, so it's important to factor this in when reviewing your investments. While cash can help you preserve your retirement savings and cover your daily expenses, it may not help you beat inflation. Bonds may help you but usually not to the same extent as stocks, which have historically outpaced inflation. That's why it's generally a good idea to keep at least a small portion of your retirement savings in stocks. Using a mix of asset classes can help you pay your bills while weathering changing economic conditions.

4. Get a part-time job or side gig

The extra money you earn can help supplement your retirement income. But before you rush out to find a gig, you'll want to make sure your wages won't reduce your Social Security payments or bump you into a higher tax bracket. Any actions you take should enhance your withdrawal strategy—not hurt it.

Don't let inflation derail your retirement dreams

While prices for your daily essentials can remain steady for periods of time, they’ll likely increase at some point during your retirement, and you need to be prepared. Reviewing your drawdown strategy annually—and making adjustments when necessary—can help minimise the impact changing economic conditions can have on your retirement income.

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