What is a Systematic Withdrawal Plan?

Systematic withdrawals provide a disciplined way to take money out

Direct deposit slip.
Systematic withdrawals can be direct deposited to your checking account. Comstock Images/Getty Images

When you set up an investment account so that you automatically take money out on a regular basis (such as monthly) it is called a systematic withdrawal.

Systematic withdrawals are used frequently for mutual fund accounts, annuities, and sometimes for brokerage accounts. 

When you use a systematic withdrawal for an IRA account you can usually set it up so that federal taxes are automatically withheld from your withdrawal.

Some investment firms also allow you to have state taxes withheld.

How does a systematic withdrawal plan work?

With a systematic withdrawal shares of your investment are liquidated, or sold, as needed to supply the stated amount of your withdrawal. If you own several mutual funds (or several sub-accounts inside a variable annuity), then shares are sold proportionately to what you own. This helps keeps your overall asset allocation in balance.

For example, let's say you own three mutual funds. Fifty percent of your money is in ABC fund, and 25% each in XYZ and WGT funds. If you set up a $1,000 a month systematic withdrawal, than 50% of your withdrawal amount ($500) would come from ABC fund and 25% each ($250) from XYZ and WGT fund.

Instead of using several funds, you could use one balanced fund and take systematic withdrawals from it, or you could use a retirement income fund that is managed for the purpose of sending you monthly income.

Downside to systematic withdrawals

The downside to systematic withdrawals is that when your investments are down in value more shares have to be liquidated to meet your withdrawal needs. In a market correction or bear market, this can have the reverse effect of a dollar cost averaging strategy, actually lowering your overall internal rate of return when compared to other withdrawal strategies.

Alternatives to systematic withdrawals

One alternative to a systematic withdrawal plan is to keep a year’s worth of withdrawals in a money market fund, taking your monthly withdrawals from this; then rebalancing your account once a year. Each year when you rebalance you would sell investments that had the highest rate of return and use the proceeds to replenish the funds spent from the money market fund.

Other alternatives to a systematic withdrawal plan include:

What is the best withdrawal plan for you? I don't know, because I don't know your financial circumstances, age, risk tolerance, etc. Each type of withdrawal plan has pros and cons, and the one that may be best suited for you may not be the one best suited for someone else. A retirement income planner can help you sort through your options and find an approach that best suits you.