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How Much Should You Withdraw From Your Retirement Savings Each Year?

How Much Should You Withdraw From Your Retirement Savings Each Year?

Retirement is supposed to be a time of simplicity, when you relax, spend your time however you want, and live on your hard-earned savings. Unfortunately, your retirement probably won’t have the kind of financial simplicity you’re dreaming about. As a retiree, you’ll have important financial decisions to make. And one of the biggest of those decisions is how much money you can and should be taking out of those retirement savings accounts every year.

The 4% rule

Money experts love to come up with rules and give them catchy names. Some of these rules even work, but because economic and financial environments are always changing, even the best rule typically doesn’t work forever. The 4% rule is a great example. It was first developed in 1994, based on the work of a financial analyst who studied historical stock and bond returns. He concluded that a retiree could withdraw 4% of their savings annually for at least 30 years without running out of money. If you like, the rule allows you to adjust your annual withdrawals for inflation, meaning that you would increase the withdrawal amount by the inflation rate for the year.

Cash in envelope labeled '401k'
Image source: Getty images.

Problems with the 4% rule

The 4% rule provides a neat, tidy way to plan retirement withdrawals. Unfortunately, this may not work as well today. It was based on historical stock returns and interest rates well before the Great Recession. Accounting for the near-zero returns of the “lost decade” of 2000-2009, the data no longer supports the idea that a 4% withdrawal rate for 30 years is completely safe. And with people living longer than ever, you might even need to look beyond 30 years as a retirement time frame. So as nice as it would be to rely on one simple number, if you want to be fairly sure that you won’t outlive your money, you’ll need to customize your withdrawal amount to your own situation.

Financial factors

Before you can decide how much you can safely take from your retirement savings accounts, you need to decide just what your goals are for that money. One of the biggest considerations is how long you want your retirement accounts to last. This will depend chiefly on your retirement date and expected lifespan, since these factors together will determine just how long your retirement will be, but there may be other issues to consider as well. For example, do you want to have some money left over to leave to the kids or grandkids? If so, you’ll need to be a lot more conservative in your spending than someone with a “you can’t take it with you” mentality. Once you’ve decided how long you want your retirement accounts to last (be generous here; it’s better to have your money outlive you than vice versa), the other major factor to look at is how well your portfolio has performed during the year.

Coming up with a magic number

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