How Much Should You Withdraw From Your Savings During Retirement?

The suggested rate of withdrawal from savings in retirement as been 4% since noted financial planner Bill Bengen, CFP, first introduced it almost 20 years. However, a recent article in SmartMoney questioned the viability of the 4% rule.

More recent recommendations can range anywhere from 7% (Retirement Management Journal) to 1.8% (Journal of Financial Planning) — quite a big difference. While 4% of savings may be a good point to start from, the reality is that any annual savings depends on many factors, both external — the state of the market, interest rates and inflation — and internal — your lifestyle, your spending habits and when you decide to retire, among others.

One school of thought rejects the notion of a fixed withdrawal percentage throughout retirement. Typically, the formula for withdrawing a set amount of your assets each year is based on a fixed set of assumptions — for example, how long your retirement will last, good health and an assumed rate of return on your investments. These straight line calculations are not always realistic and don’t account for all of the variables that can and will affect your finances in retirement. Life is not static. Each year’s expenses and priorities won’t be the same.

Consider this approach: schedule a meeting with your financial adviser to develop a cash flow projection for your retirement years. The purpose of this is to assess what you anticipate your retirement lifestyle to be and whether these plans match up well with your projected assets. Overall, there are many factors to bake into the plan.

Some financial advisers can run Monte Carlo simulations within your cash flow projections to help estimate the probability of financial well-being based on a set of variables that could include tax rates, market fluctuations, investment management fees, your asset allocation (including your risk tolerance), an average investment return spanning several years, travel costs, projected life span, health care bills, etc., and your pension (if applicable).

Running out of money is not an option
This cash flow analysis can help you determine whether you will outlive your assets — which is great news in terms of your longevity, but kryptonite as far as retirement planning goes. Withdrawing too much too early in your retirement could ultimately leave you with a goose egg rather than a nest egg.

Realistically assessing how much you are spending now and planning to spend in retirement is key to a successful plan. It’s also a good idea to review your plan a year or two after retirement and readdress each internal and external category.

You should plan on updating your plan at least every two years while in retirement. As a general rule, try to save as much as you can while you are working. Remember that if you spend $200,000 a year but only save $17,000 per year maxing out your 401(k) that you are relying on one heck of a return on that $17,000 to allow you to continue to spend $200,000 in retirement.

Also, age 60 is not a good time for you to start talking to your financial adviser about retirement planning. Working together, it’s never too early to devise a cash flow — and a savings withdrawal plan — that makes sense.

While it’s beneficial to have a benchmark with which to start planning, the reality is that any fixed annual withdrawal is going to be different for each person, depending on their particular situation. Your financial adviser can outline your options, perform an analysis and determine what course of action is likely to be best for you.

Abigail Rosen is a financial adviser at Brinton Eaton, a fee-only, SEC-registered investment advisory firm based in Madison, N.J. She can be reached at or (973) 984-3352.