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Use These Retirement Withdrawal Strategies And Make Your Money Last

Use These Retirement Withdrawal Strategies and Make Your Money Last

The biggest financial challenge that retirees face is how to make their savings last the rest of their lives. Being smart about how you decide how much to withdraw from your retirement nest egg is essential to stretch your savings as far as it needs to go. Several strategies exist for people to follow in retirement, and they each have their pros and cons. By looking at all of these strategies in more detail, you can get a better sense of which is most likely to work for you and your financial situation.

The simple solution: the 4% rule

The best-known retirement withdrawal strategy is known as the 4% rule. Using this strategy, you withdraw 4% of your total retirement nest egg in the first year of your retirement. Subsequently, you calculate future annual withdrawals by taking the previous year’s amount and then adjusting it for inflation. So if you withdrew $10,000 last year and inflation ran at 2%, then in the current year, you would withdraw $10,200.

The primary benefit of the 4% rule is its simplicity. It’s trivial to calculate the right withdrawal, and it’s easy to plan for retirement using the 4% rule calculation as a guide.

A hand drops a coin into a glass jar labeled
Image source: Getty Images.

There are shortcomings to the 4% rule as well. Some of the biggest include the following:

  • There’s no guarantee that future performance in the financial markets will be consistent with the past performance on which the 4% rule is based. Low bond rates and a long bull market could make using the rule in the future more dangerous than past research would suggest.
  • The rule is particularly susceptible to large market declines early in retirement. These can strain your resources at a sensitive time for the longevity of your portfolio.
  • Much of the time, the 4% rule is too conservative, having you withdraw less than you could prudently take. That can result in working longer than you otherwise would to save up a bigger retirement nest egg than you really need.

Incorporate market movements into your withdrawal strategy

One way to deal with the shortcomings of the 4%…

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