How Much Should You Withdraw From Retirement Savings Annually?

I dont know the person who wrote this Forbes piece, but they could use a lesson in logic and reality!

The 4% rule also doesn’t take into account what you’d like to spend money on in retirement (like traveling, if possible) or what you’d need to (a new car) and when. Nor does it factor in rising health care costs and the possibility of long-term care costs.

Source: How Much Should You Withdraw From Retirement Savings Annually?

Once again the 4% rule is being knocked. Fine, there is room for discussion; 3.5% – 5%, it’s a general guideline, but to say it doesn’t take into account buying a new car is ludicrous.

If you have $1,000,000 in retirement, the rule says take out $40,000 in the first year and that amount adjusted for inflation thereafter to not run out of money. That amount needs to cover ALL living expenses … travel, new car, whatever. If it’s not enough, it is because the $1,000,000 is not enough OR your basic spending is too high NOT BECAUSE the 4% rule flawed.

WHAT YOU WOULD LIKE TO SPEND on in retirement is determined by your income. If you have any amount and you withdraw much more than 4%, to support your desired spending, you risk running out of money. It’s just that simple.

10 comments

  1. The 4% rule is unnecessarily crude. Maybe 4% is a good estimate for the first year’s retirement expenses, but then the second year’s expense estimate should depend on what you actually have left, the actual inflation rate, and perhaps other things that couldn’t be known when you calculated the the first year’s withdrawal.

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    1. The 4% rule is not an estimate of expenses but an estimate of your income from your investment source.

      After adding up other sources of income such as social security and pensions, you MAY BE able to count on getting 4% from your investments over time to supplement your retirement income budget. This of course assumes that your risk and investment profile (over time) will earn you more than 4% ROR. A greater 4% ROR protects your against inflation and not running out of money. Fidelity Investments was using a 5.29% ROR while other people will use the non-conservative historic DowJones ROR of 7-8%.

      If you are spending more money than your total income from social security, pensions, IRAs, etc. then you have a spending problem. One might need to save more or pay off debt to get the expenses to be less than your expected income in retirement.

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      1. The 4% rule is derived from an estimate of your income from a portfolio, as you say, but it also requires an estimate of your annual expenses. You want to match up income and expenses, modulo other sources of income, for 30 years.

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    2. I don’t see a problem with the Forbes article. Maybe it will help to distinguish between estimated withdrawal amounts and actual ones. They needn’t be the same. When you re estimating how how large your nest egg should be, you need to estimate the withdrawal amounts, But during retirement, you need to decide how much to actually withdraw for expenses. This latter is sometimes assumed to be the same as the estimate you made earlier, when you were estimating nest egg size, but they needn’t be the same. because much may have changed during your earlier retirement years. That is the point being made in the Forbes article.

      You’re talking about estimated withdrawals, while the article deals with actual withdrawals.

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      1. I have to disagree. The 4% rule merely illustrates how much income can be withdrawn from savings and in theory not run out of money. It doesn’t consider any expenses or lifestyle. That’s a whole different calculation. If I have a million dollars and that’s all and I don’t want to run out of money and I want to keep up with inflation, I better know how to live on $40,000 a year plus inflation adjustment, including financial emergencies. And I better have investments returning more than 4%.

        If not, I need more investments or fewer expenses. The variables are the amount of assets and spending, not the 4%. $40,000 insufficient? Then save 2,000,000 but don’t withdraw 6% from the million.

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  2. Richard: My complaint here as well as the many other articles I have read regarding the 4% rule is that the authors don’t take the IRS Required Minimum Distribution (RMD) into account in these discussions. I set up an Excel worksheet to track actuals and predictions going out twenty years. My worksheet is conservative in that I predict income at 4% and small losses in the market each year. Only Year1 was below 4%; beginning in Year10, withdrawals exceed 5% due to the mortality tables that the IRS employs.

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    1. A very good point. The RMD grows to exceed the 4% rule. I think the answer is to reinvest that portion of the RMD not needed in a given year. That’s what I have been doing and putting it in municipal bond funds.

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      1. I take all RMDs into a taxable investment account, then I withdraw living expenses from this other account, as dictated by the 4% rule (or whatever other rule I’ve chosen). Withdrawals need have no logical relationship to RMDs

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      2. No, I’m saying the RMD grows each year after it begins and in a few years exceeds 4%. You would not take an additional 4%

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