How Much Should You Withdraw From Your Retirement Accounts?

How the 4% Rule Does (and Doesn't) Apply to Today's Retirees

A wallet containing $100 bills.
A wallet containing $100 bills. KTSDESIGN/SCIENCE PHOTO LIBRARY/Getty Images

Since 1994 when William P. Bengen published his research showing that a retiree could withdraw approximately 4% of his retirement portfolio, adjust it annually for inflation, and still be reasonably sure to outlive his money, the 4% rule has become somewhat of an industry standard as the safe retirement withdrawal rate. But, like any other rule of thumb, certain problems are presented when the guidance is looked at closely.

Let's take a look at some of the current thinking about safe retirement account withdrawal rate.

Safe Withdrawal Rates: More Than a Rule of Thumb?

As Michael Kitces shared with the financial adviser community in Resolving the Paradox – Is the Safe Withdrawal Rate Sometimes Too Safe? (May, 2008), a scenario in which two couples with identical portfolios retire a year apart can lead to surprising and somewhat illogical results depending on what happens in the market the respective years the couples retire. If the market were to increase or decrease substantially during the year when one couple retires but the other has not, each couple will likely be advised of fairly different safe withdrawal amounts over the rest of their lives based on the 4% rule introduced by Bengen, even if comparatively, the advised withdrawal amounts are contradictory. This occurs despite having the same starting portfolio.

Under the 4% rule, only the timing of their retirement date and the couple's account value at the time of retirement dictates the dramatic difference in the suggested sustainable standard of living. With no other considerations being made, the 4% rule only simply does not provide a hard and fast answer to having a sustainable level of retirement income.

It is but a starting point. Consider a couple, for instance, who retired just before the bear market of the 2008 financial crisis. According to the 4% rule, they should reasonably be able to withdraw the same amount they withdrew the year before, adjusted for inflation. But is that withdrawal amount still sustainable after the hit their portfolio took in 2008? The question is simply not answered by the 4% rule alone.

So What is a Safe Retirement Withdrawal Amount?

No sure risk-free solution to a safe withdrawal rate exists. Every suggestion has either the risk that you spend too much too quickly and run out or that you spend too little and, late in life, become disappointed you didn’t spend more earlier on during retirement. My suggestion is to use the 4% rule as a starting point, being mindful of some key factors that may guide you to spend more or less in any given year during the course of your retirement, such as:

  • Your health may decline as you get older. Consider spending more in the beginning of retirement on items like travel and vacation with the knowledge that your travel budget early in retirement may very well need to be reallocated to your health care budget later in retirement.
  • The market may take a severe downturn shortly after you retire. If this happens to you as it did to retirees just before 2008, consider ratcheting back spending in the early years to give your investments a chance to come back rather than realizing your loss by selling at a relative low point.
  • You may outlive your live expectancy. Today, many retirees are living well into their nineties and others must take on the additional expense of longer life along with other budget killers like long term care. In order to hedge the risk of outliving your assets, consider combating the possibility by the purchase of an immediate annuity or a longevity annuity to ensure that you are covered. Long term care insurance is also worth considering.

Retirement Withdrawal Rates Are Not a Sure Thing

Even with this limited information, you can likely see why it’s virtually impossible to give precise guidance to how much you can afford to spend in a given year during retirement.

There are simply too many unknown variables. Yet, as people crave simplification from the increasingly complicated concept of retirement, rules of thumb can be useful. Personally, I will strive to start at 4% one day, knowing there are a bunch of variables, many of which I cannot control, that may change my ultimate spending ratio from year to year. Reevaluating my portfolio and budget will simply be part of the equation every year.

The Bottom Line

Determining a safe retirement income based on your portfolio value is just not as simple as one withdrawal rate. But the close monitoring of your portfolio and spending, possibly with a competent financial adviser at your side, can give you the confidence to spend comfortably on the items you truly desire with the timing that makes sense given your overall goals for retirement. Perhaps the most important retirement income planning strategy to take is to create a plan before you start tapping into your retirement investments.