Your retirement portfolio: How much should you withdraw each year?
You’ve worked all your life to afford the retirement you want. But how much can you withdraw from your portfolio each year and not run out of money?
In 1994, a financial advisor named William Bengen decided to calculate how much a retiree could safely spend each year. His answer: 4%. Based on historical data, he found that this was the starting amount a retiree could withdraw from a portfolio of half stocks and half bonds to last at least 30 years. But while many point to a 4% initial withdrawal rate as a good starting point, it’s based on certain assumptions that might not apply to you.
How the 4% rule works: a hypothetical example
Why 4% might not work for you
Using Edward Jones’ capital market assumptions, we generally recommend an initial withdrawal rate of 3.5% to 4% for someone starting portfolio withdrawals in their mid- to late 60s. This assumes they’ll increase their withdrawals by 2.75% each year for inflation, a life expectancy of 92 and a primary goal of retirement spending. In general, we recommend withdrawal rates closer to the “More conservative” column if:
- You expect to have a longer retirement (either because of an earlier retirement date and/or history of family longevity).
- Leaving a financial legacy is a primary goal.
- You rely on your portfolio for most of your income needs (rather than other sources such as Social Security, pension or an annuity).
- You have less flexibility to adjust your expenses.
The chart below highlights our general guidance for an initial withdrawal rate depending on a person’s age and whether they want to be more or less conservative with their rate.
Withdrawal rate guidance is based on estimates of the probability of different portfolio allocations lasting to age 92. Assumes withdrawals increase by 2.75% annually for inflation. We assume the portfolios have a mix of cash, fixed income and equities. Expected returns based on long-term capital market expectations for cash of 2.9%, fixed income of 3.8% to 6.0%, U.S. stocks of 7.2% to 8.8%, and international stocks of 7.2% to 8.4%. We also assume an annual fee of 1%. Withdrawal rates can include the withdrawal of principal. If preservation of principal is a high priority, you may need a lower withdrawal rate. In general, the higher your withdrawal rate, the greater the risk your money may not last throughout your time horizon.
Withdrawal rate guidance is based on estimates of the probability of different portfolio allocations lasting to age 92. Assumes withdrawals increase by 2.75% annually for inflation. We assume the portfolios have a mix of cash, fixed income and equities. Expected returns based on long-term capital market expectations for cash of 2.9%, fixed income of 3.8% to 6.0%, U.S. stocks of 7.2% to 8.8%, and international stocks of 7.2% to 8.4%. We also assume an annual fee of 1%. Withdrawal rates can include the withdrawal of principal. If preservation of principal is a high priority, you may need a lower withdrawal rate. In general, the higher your withdrawal rate, the greater the risk your money may not last throughout your time horizon.
The reality of your retirement income
While withdrawal guidance is helpful, it’s important to remember that no single rate or strategy will work for everyone. Withdrawal rates are only a starting point. Don’t automatically take a raise each year, especially if you don’t need it or your portfolio’s performance is weaker than expected.
Being flexible with your withdrawals can meaningfully increase your portfolio’s longevity. That’s why it’s important to outline all your expenses — the “nice to have” as well as the “need to have” — with the help of your financial advisor to personalize your withdrawal strategy. You’ll then want to review your strategy with your financial advisor at least annually and adjust it as needed.
Also, keep in mind that your retirement income strategy isn’t just about income. You should focus on your overall investment strategy, not just on your withdrawals. It’s important to incorporate some growth investments during your retirement to help maintain your standard of living as expenses rise over time.
Your financial advisor can look at your retirement age, life expectancy, investments, spending patterns and income strategies to help determine a withdrawal strategy that makes sense for you.