Systematic Withdrawal Schedule

What Is a Systematic Withdrawal Schedule?

A systematic withdrawal schedule is a method of withdrawing funds from an annuity account that specifies the amount and frequency of the payments to be made to the annuitant. Annuitants are not guaranteed lifelong payments as they are with the standard annuitization method, but they provide a stream of income to retirees.

With the systematic withdrawal schedule, one chooses instead to withdraw funds from an account until it is emptied, bearing the risk that the funds become depleted before one dies.

Key Takeaways

  • Many people purchase an annuity product to provide a steady and reliable stream of income in retirement. 
  • A systematic withdrawal schedule is a method of withdrawing funds from an annuity account.
  • The standard annuitization method provides guaranteed lifelong payments, unlike a systematic withdrawal schedule.
  • You must pay taxes on annuity payments, as they are a form of income, although they grow in a tax-deferred account. 

Understanding the Systematic Withdrawal Schedule

Systematic withdrawals are often applied to mutual funds, annuities, and occasionally for brokerage accounts. Systematic withdrawal schedules allow for shares of investments to be liquidated to provide the stated number of withdrawals in the plan.

Special Considerations

Alternatives to systematic withdrawal schedules include putting a time-based segmentation approach, i.e., bucket strategy, into place; buying an immediate annuity from an insurance company and living off the monthly benefit the company pays out. Other withdrawal methods can include investing one’s savings and spending only the interest and dividends and placing a year’s worth of withdrawals in a money market fund for monthly withdrawals. In this last method, the funds would be replenished at the end of each year by selling off the investments with the highest yield. All three plans can provide some income to a retiree.

A systematic withdrawal schedule can be set up to be paid every month, quarterly, semi-annually, or annually.

Advantages and Disadvantages of a Systematic Withdrawal Schedule

An advantage of a systematic withdrawal schedule is that it can streamline a person's wealth management strategy, particularly during retirement. It can also help come tax time.

The investor choosing this withdrawal method, instead of the annuitization method, would not be limited to a set amount of money every month and could, in fact, remove the funds from the account relatively quickly if necessary. The ability to access funds could be useful in the case of an emergency.

The disadvantage is that it does not guarantee a lifelong income stream for the annuitant, placing the risk of a longer-than-expected lifespan on the shoulders of the annuitant instead of on the insurance company offering the annuity. If the annuity runs out, the retiree would need other sources of income to fund his or her retirement.

Example of a Systematic Withdrawal Schedule

Consider, for example, an annuitant owning four mutual funds. Fund A holds 35% of all funds, Fund B holds 30%, Fund C holds 20%, and Fund D holds 15%. If the annuitant sets up a $2,000 monthly withdrawal, $700 (35%) of the withdrawal amount will come from Fund A, $600 (30%) would come from Fund B, $400 (20%) would come from Fund C, and $300 (15%) would come from Fund D.

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