How Much Can You Safely Withdraw Each Year Without Running Out of Money?
One of the most common questions and concerns the pre-retiree clients I serve face is: how much can I actually take out every year without running out of money?
Now, there are many rules of thumb for this question—the 4% rule most commonly—but the real answer is more nuanced than a single number. The 4% rule is a good starting point and a basic rule of thumb, but the reality is that it's not a plan for people nearing retirement; you need the context of the whole picture for it to be useful.
Where the 4% Rule came from
The 4% rule was developed in 1994 by financial planner Bill Bengen. He created this rule by analyzing historical market data going back to 1926, looking at what withdrawal rate would have survived every 30-year retirement period in history.
What he found was that withdrawing 4% of your portfolio in year one, then adjusting for inflation each year after, survived every historical 30-year window—including periods during the Great Depression and the Great Recession.
The 4% rule is not an arbitrary number, but a percentage determined to maximize your success and keep you from running out of money in all historical market situations.
The 4% Rule is only a starting point, not an answer.
The 4% rule was built with many assumptions that may not hold true for your specific situation. For one, it was built for a 30-year retirement, but if you retire at 55, you may need a 40-year-long retirement plan.
It also modeled a 50/50 stock-to-bond ratio; your portfolio allocation may be different in order to meet your goals. It doesn't account for taxes—a 4% withdrawal from a tax-free Roth account will yield much different results than a 4% withdrawal from a taxable qualified IRA account over 30 years.
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What determines your actual withdrawal rate?
The actual retirement withdrawal rate is based on many factors. For example
Your retirement age and time horizon— longer runway requires more conservative withdrawal
Portfolio allocation — more equities historically supports higher withdrawal but with more volatility
Flexibility — can you reduce spending in a bad market year? That flexibility is worth a lot
Other income sources — Social Security, pension, rental income reduce how much the portfolio has to do
Tax situation — which accounts you draw from and in what order changes the real number significantly
Treating the 4% rule as a ceiling rather than a starting point for a real conversation isn't the right way to plan for retirement.
You must plan for taxes, stress test the plan and projections, and plan for healthcare expenses.
Ultimately
There is no one size fits all retirement withdrawal rate. Each withdrawal rate is different and depends entirely on your goals and timelines.
While the 4% rule is useful it is no substitute for a financial plan or a real retirement income plan.
Remember, the goal isn't just to make the money last, it is to make the money last while living the life that you planned for.
Thanks for reading.
Sources and recent readings:
Recent blog:
https://hamiltonfinancialplanning.com/blog/when-to-know-you-should-work-with-a-financial-advisor/
Schwab article:
https://www.schwab.com/learn/story/timing-matters-understanding-sequence-returns-risk
If you have any questions head to HamiltonFinancialPlanning.com to find out more and schedule a free call with our fee only CFP fiduciary advisors who specialize in building financial plans and investment management for clients nearing retirement in Austin and Houston TX.
Scott Hamilton is founder and chief financial officer at Hamilton Financial Planning, a wealth management firm that specializes in providing comprehensive financial planning for retirees. With over 20 years of experience in the financial industry, and having completed over 250 financial plans for retirees across all industries, Scott is passionate about providing his clients with the tools and insight they need to achieve their financial goals. He has a Bachelor of Business Administration in finance from Texas State University and an MBA in international finance from Pepperdine University. Scott has also been happily married to his wife, Gayle, for over 25 years. To learn more about Scott, connect with him on LinkedIn.