The Ideal Withdrawal Rate for Retirement: How to Make Sure Your Savings Last as Long as You Need Them

For decades, the 4% retirement withdrawal rule has served as a guideline for retirees. While this general rule provided simplicity and reassurance, today’s retirees face new economic realities that benefit from a more nuanced and personalized approach.

What is the 4% rule?

The rule of thumb is that if you withdraw 4% of your retirement savings annually, adjusted for inflation, your savings should last you through 30 years of retirement.

When financial planner William Bengen first proposed this rule in 1994, he analyzed continuous 30-year periods, starting in the 1920s, to determine a safe withdrawal rate that could have survived even the worst market conditions, including the Great Depression and periods of high inflation—assuming a diversified portfolio.

The 4% rule is a good starting point.

Start with the end in mind.-Stephen R. Covey

The 4% rule was designed as a means to the ultimate goal of fully funding your retirement. From that perspective, it’s a decent framework.

However, it is just a general rule and should not be considered a complete retirement strategy.

The 4% rule has flaws.

The financial landscape has changed since the 1990s when the 4% rule was put in place. While interest rates are higher now, they are still lower than they were when the rule was put in place. In addition, increasing longevity and unpredictable market conditions are putting pressure on the sustainability of the 4% withdrawal rate.

For example, a large market decline early in retirement, often referred to as return sequence risk, could deplete savings more quickly than expected. Additionally, today’s retirees may live longer than previous generations, which may require stretching their savings even further.

What is a good withdrawal rate for retirement?

These days, financial planning experts suggest setting a withdrawal rate between 3% and 5%. However, it’s much better to understand your personal goals, evaluate what’s right for you, and come up with a withdrawal strategy tailored to your retirement.

NEW: You can see your retirement withdrawal rate in the new Retirement Planner (part of your Financial Wellness Dashboard)!

A Better Way to Think About Retirement Withdrawals

The 4% rule is not ideal for today’s economy. More importantly, it is not the best way to achieve your retirement goals of living a fulfilling life and enjoying financial security for life.

Withdrawing retirement funds should be considered in light of your personal financial situation. Your spending needs (and desires), your retirement income sources, and other tax-minimizing and estate-leaving goals should be considered.

Let’s explore how to determine your personal retirement withdrawal rate:

Your retirement spending goals

The most important thing you can do if you want a secure retirement is to envision the future you want and budget for it. You want to anticipate all of your spending needs throughout your retirement. The reason you withdraw money is because of how you want to spend your money.

Your projected expenses should reflect your basic living expenses, such as housing, health care, and daily necessities, as well as your discretionary spending on activities such as travel, hobbies, and entertainment.

The new retirement planner will help you forecast your spending in meaningful ways:

• Record all future large one-time expenses (college costs, new cars, travel, etc…)
• Consider how your variable expenses will change over time. Enter the different stages of spending (going forward, going slow, not going forward, for example) as a total amount in your base budget, or use a detailed budget to change expenses in more detail.
• Document how your housing expenses have changed over time.
• Get an estimate of your medical costs.
• Look for ways to cover the possibility of long-term care.
• If you have debt, let your new retirement planner show you when those debts will be paid off.

Here are 9 ways to forecast retirement spending and why it’s so important to do it right.

Your retirement income sources

Retirement withdrawals are unlikely to be your only source of retirement income. You likely have Social Security, possibly a pension, and possibly even other investment or passive income sources.

This income compensates for your need to withdraw from savings.

The gap between your spending and your income is the basis for your personal withdrawal strategy.

The gap between your retirement spending and your retirement income is the amount you are expected to need to withdraw from savings.

In your new retirement plan, you have three options for dealing with the gap between your spending and income. (See My Plan > Money Flows > Withdrawal Strategy.) You can forecast withdrawals based on:

• Your spending needs: This is the default option. The planner calculates your withdrawals based on the gap between your income and expenses.
  • When thinking about the gap, you may want to distinguish between spending needs—those necessary to maintain your standard of living—and spending wants, which are more flexible and lifestyle-focused. If you’ve used the detailed budget in your new retirement planner, you can switch between “must spend” and “want to spend” budgets.

• Fixed rate withdrawal: If you choose a fixed percentage, the system will anticipate withdrawals for the gap amount plus additional funds up to the percentage you specified for withdrawals. (However, if withdrawals to cover the gap are higher than the fixed percentage value, the system will take the higher amount, prioritizing what you specified as spending.)
• Maximum spending: If you choose this withdrawal strategy, the new retirement plan will maximize your withdrawals while maintaining the amount you set for your legacy goal.

Financial legacy goals

If you want to leave a portion of your savings to your heirs, you must exclude that amount from your retirement projections. The new retirement planner allows you to set a financial goal for your legacy, and that amount is excluded from retirement withdrawals.

Taxes

Taxes play an important role in retirement withdrawal strategies, as different types of accounts are taxed differently. Withdrawals from traditional IRAs, 401(k)s, and other tax-deferred accounts are typically subject to income tax, while withdrawals from Roth IRAs are tax-free if certain conditions are met.

Required minimum distributions (RMDs) from traditional accounts begin at age 73, and failure to take them can result in hefty penalties. To manage your tax burden, you may want to strategically withdraw more in some years, such as when you’re in a lower tax bracket, and less in other years.

This may also include converting some of your traditional IRA funds to a Roth IRA, a process known as a Roth conversion. While you’ll pay taxes on the conversion amount, it can reduce your minimum required withdrawals in the future and allow for tax-free withdrawals later on. By timing your withdrawals carefully and considering Roth conversions, you can improve your tax situation and make your retirement savings last longer.

• Use Tax Insights and Roth Conversion Explorer to strategize how to best make withdrawals to minimize taxes.
• You will soon be able to set up a custom withdrawal order to assess the impact on your taxes and assets.

Forget the 4% rule, use the new retirement planner for a smart, personalized plan

Developing an effective retirement withdrawal strategy requires a thoughtful balance between meeting your immediate financial needs and achieving your long-term financial goals. Using a new retirement planner makes this task easier.

By carefully estimating your projected income and expenses, adjusting for taxes, and considering inherited goals, you can create a plan that supports your current lifestyle and future goals.

Strategic decisions, such as changing withdrawal amounts and taking advantage of Roth conversions, can help manage your tax liabilities and extend the life of your savings. Reviewing and adjusting your strategy regularly ensures that you stay on track and enjoy a financially secure and fulfilling retirement.