Deciding how much to withdraw from your retirement accounts means finding a balance between enjoying life and making your money last. Taking too little leaves you with unused savings, while taking too much risks running out of money later. Taxes also affect how much you can actually spend. To help you create a retirement budget, let’s break down the example of a 67-year-old with $870,000 in a 401(k), $120,000 in an IRA and $26,400 annually from Social Security. Here’s what a withdrawal plan could look based on two rates.
A financial advisor can help you create a withdrawal strategy that balances your lifestyle needs, tax impacts and long-term retirement goals.
Know Your Taxes
A 401(k) and a traditional IRA are both retirement accounts funded with pre-tax dollars. Contributions are deducted from your taxable income, allowing you to grow savings faster because the money enters the account before taxes. In retirement, however, all withdrawals are taxed as ordinary income. This includes both the money you contributed and the investment earnings.
This is different from a Roth IRA, which is funded with after-tax dollars. You do not receive an upfront tax deduction for contributions. The benefit comes later: withdrawals in retirement are tax-free, including both contributions and earnings.
Assuming that you have a traditional IRA in this example, every withdrawal you take in retirement is counted as taxable income. Because this is a pre-tax account, withdrawals are taxed at income tax rates, not the lower capital gains rates that apply to taxable investment accounts.
Anticipate RMDs
Required minimum distributions (RMDs) begin at age 73 for anyone with pre-tax retirement accounts such as 401(k)s and IRAs. The IRS requires you to calculate the withdrawal separately for each account, although IRA balances can be combined if you prefer to take the full amount from just one IRA. For 401(k)s, however, the distribution must be taken directly from that account.
The amount of your RMD is based on the balance of the account as of December 31 of the prior year and a divisor taken from the IRS Uniform Lifetime Table1, which assigns factors according to age. At age 73, the divisor is 26.5.
For example, if you still had $870,000 in your 401(k) at age 73, you would divide that balance by 26.5. The result is $32,830, which is the minimum you would be required to withdraw from the account for that year. You would then repeat the same calculation for your IRA using its own balance at year-end.
The RMD rule is designed to make people withdraw money from pre-tax retirement accounts and pay taxes on it. For many retirees this doesn’t have much impact, since their regular withdrawals already exceed the required minimum. The rule matters more if you hold multiple accounts, because you cannot leave one untouched indefinitely while only drawing from another.
Between ages 67 and 73 you can keep your savings in place and choose how to take withdrawals. For example, you might spend down an IRA first before turning to a 401(k). But starting at age 73, you must begin taking minimum withdrawals from every pre-tax account that still holds assets.
Create a Withdrawal Strategy
Creating a withdrawal strategy means aligning your spending needs with what you can draw sustainably from your accounts after taxes. Social Security benefits may be taxable up to 85%, depending on your other income. That means withdrawals from retirement accounts can affect both your taxable income and how much of your Social Security is taxed.
For 2025, the standard deduction is $31,500 for married couples filing jointly and $15,750 for single filers. Seniors also receive an additional $2,000 deduction per person age 65 or older. A temporary $6,000 bonus deduction for seniors was created in the One Big Beautiful Bill Act, but that provision begins in 2026 and runs through 2028. It phases out once income exceeds $75,000 for single filers or $150,000 for married couples. (Note that for 2025, only the standard deduction and the age-65 add-on apply.)
To show you how a withdrawal strategy could work, let’s take the example of a household with $870,000 in a 401(k) and $120,000 in an IRA, plus $26,400 a year in Social Security. With a 5% withdrawal rate, the accounts generate $49,500. Adding Social Security produces total income of $75,900. At that level, 85% of the Social Security benefit becomes taxable, which brings adjusted gross income to $71,940. After subtracting the $35,500 deduction available to a couple over age 65 in 2025, taxable income comes to $36,440. Federal tax liability would be about $3,896, leaving roughly $72,000 after taxes.
If the withdrawal rate goes up to 8%, the accounts produce $79,200, which increases total income to $105,600 once Social Security is included. Again, 85% of Social Security is taxable, which brings adjusted gross income to $101,640. After subtracting deductions of $35,500, taxable income is $66,140. Federal taxes on that amount would be about $8,659, leaving just under $97,000 after taxes.
Compared side-by-side, the 5% withdrawal strategy delivers an after-tax income of about $72,000, while the 8% withdrawal strategy provides closer to $97,000. The larger withdrawal results in higher spending power in the short term but carries more risk of depleting savings sooner.
Research generally suggests that long-term sustainable withdrawal rates fall between 3.5% and 4% for a 30-year retirement horizon. The right balance will depend on portfolio returns, spending needs and tax treatment, but under these assumptions a sustainable range of after-tax income is likely between $70,000 and $97,000 per year.
Bottom Line
Your retirement budget will depend on a number of factors, but two important issues are taxes and required minimum withdrawals. As you make your retirement budget, make sure to account not only for your withdrawals, but for how much of those withdrawals you will get to keep.
Retirement Planning Tips
- If you need more of a hans-on approach to retirement, a financial advisor can help you build a comprehensive plan. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Don’t forget that your state (and maybe even city) can levy taxes too. If you want to maximize your retirement withdrawals, looking for states that don’t tax those portfolios might be a smart strategy.
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