As retirement approaches, you’ll face a number of important decisions—and one that might not be on your radar yet is figuring out exactly how much to withdraw each month from your retirement savings. It’s a crucial question, but also a tricky one, since the right answer depends on several unknowns: how long your retirement will last, how your investments will perform, and what your living expenses will be.
Thankfully, financial experts have developed a few popular strategies to help guide your decision-making. Keep in mind, though, that these rules of thumb are just that—general guidelines. It’s always best to discuss your personal plan with a financial professional who understands your unique goals and situation.
Start with the Savings
Before you can figure out how much to withdraw, you first need to know how much you’ll need to save. Here are two of the most common approaches to help estimate your savings goal:
- The $1,000 Rule: Want to withdraw $1,000 per month in retirement? Aim to save about $240,000. This rule assumes a 5% annual withdrawal rate and provides a quick way to do the math for monthly income goals.
- Multiply by 25 Rule: This is a simple and widely used method. First, determine how much income you’ll need annually in retirement. Then multiply that number by 25. For example, if you’ll need $50,000 a year, you’ll want about $1.25 million saved. This assumes a 4% withdrawal rate, which brings us to…
Popular Withdrawal Strategies
Once you’ve saved up, the next big question is how much to safely take out each year. Here are the most common “rules” retirees use:
The 4% Rule
Introduced in the 1990s by financial advisor Bill Bengen, this rule suggests you can withdraw 4% of your retirement portfolio annually without running out of money for at least 30 years. It’s based on historical market data and was designed as a conservative, worst-case scenario.
Today, Bengen himself says 4% may be too rigid for many retirees and that more flexible strategies could be a better fit depending on your personal finances, market conditions, and goals. He has revised his withdrawal rate suggestions to be between 4.5% and 4.7%.
The 5% Rule
Some believe 4% is too cautious and opt for a 5% withdrawal rate. This approach could work well if:
- You’re carrying little or no debt
- Your portfolio is well-diversified
- You’re comfortable with more risk and market volatility
It can give you more income in the short term but may be harder to sustain over the long haul.
The 3% Rule
On the other end of the spectrum, some retirees play it safe with a 3–3.5% withdrawal rate. This conservative approach may be a better fit if:
- You’re retiring early and need your money to last longer
- You plan to leave money to heirs
- You want to protect yourself from market downturns
While you’ll withdraw less each year, this strategy may provide more long-term security and peace of mind.
Related: A Simple Guide to RMDs for Retirees
You Don’t Have to Follow the Rules
These guidelines can be helpful starting points, but remember: retirement isn’t one-size-fits-all. Your withdrawal rate should reflect your lifestyle, your goals, and your risk tolerance. Depending on how your investments perform, you may be able to take out less each year while still enjoying the same (or even more) income than you would have at a higher withdrawal rate.
At the end of the day, the best strategy is the one that works for you—and it’s something to explore with your financial advisor in detail.
Want more? Check out our blog, Moving from Retirement Accumulation Phase to Distribution Phase: 4 Tips to Know
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