Most people spend decades planning for retirement. They diligently set aside a portion of their hard-earned wealth in IRAs, qualified retirement plans, investments and other savings vehicles. While a solid saving strategy is critical to maintaining your current lifestyle in retirement, it’s just as important to have a well-thought-out retirement spending plan.

The amount you spend in retirement — and the order in which you withdraw funds from various taxable, tax-deferred and tax-free savings vehicles — can significantly affect your nest egg’s lasting power. Here are a few tips for developing a retirement spending plan.

Develop a budget

As you approach retirement, take stock of your savings and income sources (including Social Security) and project your expected retirement expenses. Then, create a realistic budget to determine how much you can spend each year without jeopardizing your financial health. You may have heard of the “4% rule,” which says that retirees should withdraw 4% of their savings each year, adjusted for inflation, to minimize the chances of outliving their savings.

But the rule is merely a rough guideline. It’s no substitute for a spending plan that reflects your personal circumstances. For example, do you expect your income requirements to change as you age? Does your family’s health history suggest that your life expectancy will be longer or shorter than the average?

Design a tax-wise withdrawal plan

Your retirement savings are likely spread among various taxable, tax-deferred and tax-free accounts. Withdrawing these funds in the “right” order can help minimize the taxes you’ll pay during retirement and ensure your savings last as long as possible.

According to conventional wisdom, you should withdraw money in the following order:

1. Taxable accounts. These may include brokerage and savings accounts. Drawing these accounts down first gives your tax-advantaged accounts as much time as possible to grow and compound. It also allows you to take advantage of lower capital gains rates in the early retirement years when your tax bracket may be lower. This may occur because you’re not yet receiving Social Security or required minimum distributions (RMDs) from IRAs and qualified plans.
2. Tax-deferred accounts. These accounts may include traditional IRAs, 401(k) plans and 403(b) plans. Withdrawals from these accounts generally are subject to ordinary income tax, so deferring them often provides a tax advantage.
3. Tax-free accounts. These accounts may include Roth IRAs, Roth 401(k)s and Roth 403(b)s. Tapping these accounts last maximizes the advantages of tax-free growth and may provide tax-free income for your heirs.

This approach is just a simple guideline, like the 4% rule described above. Depending on your personal circumstances, alternative withdrawal strategies may offer greater tax efficiency.

Pivot as needed

Under the conventional approach, it’s common to experience a sharp “tax bump” when you start withdrawing ordinary income from tax-deferred accounts, particularly if RMDs force you to withdraw more than you need. (See “Watch out for RMDs” below.)

By withdrawing some funds from your tax-deferred accounts early in retirement, you can smooth out the tax bump and reduce the impact of RMDs down the road. This can potentially reduce the overall tax impact and extend the life of your savings.

It may also make sense to depart from the conventional approach if you expect a significant gain — from the sale of real estate, for example — in a particular year. If you still need additional income that year, you may want to withdraw it from tax-free accounts to avoid pushing yourself into a higher tax bracket.

No cookie-cutter approaches

Planning for retirement is complex, and the considerations discussed are just a few examples of what you’ll need to consider. Remember that there’s no cookie-cutter approach to developing a retirement spending plan. Everyone’s circumstances are different, so it’s important to work with your financial advisor to design a plan that meets your needs in the most tax-efficient manner possible.

Sidebar: Watch out for RMDs

As you plan your strategy for withdrawing savings during retirement, be sure to consider required minimum distributions (RMDs) from traditional (as opposed to Roth) IRAs and qualified plans. The tax code requires you to begin RMDs once you reach a specified age, depending on the year you were born. For example, if you were born between 1951 and 1959, RMDs start at age 73; if you were born in 1960 or later, RMDs begin at age 75. However, you can possibly defer RMDs from certain employer plans if you continue working.

How much are you required to withdraw each year? Generally, you divide the account’s fair market value at the end of the preceding year by your life expectancy (according to IRS tables). For the year you reach the starting age, you have until April 1 of the following year to take your first RMD. After that, RMDs are required by December 31 of each year. Penalties for failure to take timely RMDs are harsh: 25% of the amount that should have been withdrawn.

To minimize taxes — and avoid being forced to withdraw more than you need from traditional IRAs and qualified plans — consider beginning withdrawals from these accounts earlier in retirement. Doing so enables you to spread taxes over a longer period and reduce the size of RMDs in the future.