How Much Can You Really Withdraw from Your Retirement Portfolio

Presented by Joshua Bradburn CFP?, CWS?

When I talk to my clients about retirement and generating income they often ask how much can they expect per month. For many years, investors and advisors alike have used the 4% Rule, and while that may be a great place to start when deciding how you'll spend your savings in retirement, it’s not the last or only word on the subject. Always remember: No rule of thumb will apply to every investor in every situation. 

How the 4% Rule works

The idea behind the 4% Rule is straightforward: Withdraw 4% of your nest egg the first year of your retirement, then increase that amount each year by enough to account for inflation. This way, your money will likely last for at least 30 years (assuming you stay invested half in stocks and half in bonds).

Here’s how it might work. Say you retire with a $1 million portfolio. In your first year of retirement, you would withdraw $40,000 ($1 million X .04). Next year, you’d withdraw $41,200 ($40,000 plus an additional 3 percent for inflation), followed by $42,436 the year after that ($41,200 plus an extra 3 percent for inflation). And so on.

Although investors and financial planners have used the 4% Rule for decades, there’s talk that it may be outdated. With bond yields at historically low levels and equity returns uncertain, some retirement experts now believe that the 4% withdrawal rate is too high and could cause investors to run out of money during their retirements. Instead, they say, investors should spend less to boost their chances of having enough to see them through their golden years.

Who’s right, who’s wrong?

Whether or not the 4% Rule still makes good financial sense depends largely on your viewpoint.

If you believe that stocks and bonds will generate lower returns during the next 30 years then they have over the past three decades, a 4% spending rate may indeed be too high. That said, others argue the 4% Rule is still relevant, or even too conservative. You really should be able to spend more early in your retirement when you’re most able to enjoy it, they say, and worry less about whether you’ll have enough to spend the same amounts later. The truth probably lies somewhere in between.

Flexibility is key

Rather than adhere rigidly to a 4% withdrawal rate, consider using the rule as a starting point while also staying flexible by taking advantage of new developments as conditions change. Here are three dynamic ways to manage your spending in retirement:

1. Develop a retirement plan and update it regularly. Online retirement calculators (such as the one at www.schwab.com/public/schwab/investing/retirement_and_planning/retirement/retirement_calculator) can help you determine a sustainable portfolio withdrawal rate based on your specific situation. Likewise, a professionally created retirement plan can give you an even more detailed analysis. But whether you do the math yourself or work with a pro, review the numbers regularly to ensure you remain on track.

2. Adjust your withdrawals based on the market’s performance or your own personal changes. A static withdrawal rate doesn’t factor in the market’s inevitable ups and downs, or changes that may occur in your health and lifestyle that demand flexible cash flow management. Therefore, you might withdraw a bit less when financial asset prices are down and increase your withdrawals when the markets are on a roll. Or you might skip making inflation adjustments to your withdrawal rate during those years when your portfolio experiences losses. These types of moves may mean your budget fluctuates each year, but they’ll also help increase the probability that your savings will last throughout your lifetime.

3. Consider an annuity. Annuities are not for everyone—they can be complex and costly—but annuity contract are one of the only types of financial vehicles that can ensure you have guaranteed income for life. With an ongoing stream of payments coming to you, you can feel more comfortable that you’ll have the income needed to cover essential expenses in retirement—even if you outlive your investment portfolio.

Joshua Bradburn, CFP?,CWS? is a financial consultant at the Charles Schwab branch in Santa Monica. He has over ten years of experience helping clients achieve their financial goals. Follow Josh on Twitter @JoshBradburnCS. Some content provided here has been compiled from previously published articles authored by various parties at Schwab. Charles Schwab & Co., Inc., Member SIPC. This is a paid advertorial.

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision. Annuity guarantees are subject to the financial strength and claims‐paying ability of the issuing insurance company.

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