What Is a “Safe” Withdrawal Rate from a Retirement Portfolio?
There is a bit of give and take to any successful retirement plan.
But finding the right balance between living a fulfilling lifestyle today while also preserving your financial security for tomorrow can feel like a challenge.
That's especially true when you are at or near retirement and begin to contemplate that, in retirement, you will no longer receive a paycheck from employment but will instead withdraw dollars from your retirement savings. And, to complicate a complicated issue even further, every financial talking head on social media and cable news seems to have conflicting ideas about how much money retirees "should" be spending from their nest eggs every year.
So, where do these rules about a "safe" withdrawal rate come from? And just how useful are they in the current economic environment?
The 4% Rule
Back in 1994, financial planner Bill Bengen wanted to answer what seems like a simple question: what is the maximum withdrawal rate a retiree could have used without completely depleting their nest egg during worst-case scenarios in U.S. market history? Bengen coined this scenario “SAFEMAX” and tested various withdrawal rates from a typical portfolio of stocks and bonds against a 30-year retirement horizon.
Bengen concluded that a retiree who withdrew 4% per year from their nest egg would have had a very high probability of not running out of money during a 30-year retirement, even if the market experienced several significant downturns. Over 30 years later, Bengen's "4% Rule" is still a popular back-of-the-napkin formula for calculating safe withdrawal rates and for helping seniors decide if they have "enough" money to retire.
Revisiting The 4% Rule
Of course, 30 years later, financial professionals also have more data to work with than Bengen did, as well as more sophisticated computer modeling systems.
For example, in a 2024 report, Morningstar analyzed the viability of The 4% Rule using a combination of both historical data and forward-looking projections about market returns, interest rates, bond yields, and inflation expectations.
Morningstar concluded that withdrawing 4% per year might not be as "safe" as it once was. A more conservative 3.7% rate might do a better job of protecting a balanced portfolio against the potential for rising equity valuations and lower future returns.
Interestingly, Bill Bengen has revised his "rule" in the opposite direction. He now argues for even broader portfolio diversification, including investments in "small-cap" equities (meaning companies with smaller valuations than the big firms tracked by the S&P 500 and the Dow Jones), as well as exposure to international stocks. Bengen says this type of portfolio could be able to support a 4.7% withdrawal rate, although he advises investors to proceed with caution due to market volatility and ongoing concerns about inflation.
What Is Your "SAFEMAX"?
While all of these analyses can be useful starting points when thinking about your retirement plan, the truth is retirement is much bigger and more complex than any one number. Your individual needs, wants, and goals are going to change in the decades ahead. And several additional variables will also come into play, such as:
Asset Allocation: The percentage of your portfolio in stocks versus bonds and your diversification all impact your potential ROI.
Expected Returns and Inflation: Assumptions about performance and the rate of inflation will determine what your unique plan will sustain.
Sequence of Returns Risk: In the early years of retirement, it’s especially important that you tap into the right accounts at the right time, or you could deplete your nest egg ahead of schedule.
Retirement Horizon: Early retirees and healthy seniors might need to plan for an extra decade or two; folks who have chronic health issues may want to spend down their nest eggs faster.
Spending Flexibility: Being intentional about your specific goals and the timing of those expenditures will allow for an ebb and flow of spending over time that matches your needs.
Other Income Sources: Guaranteed income from Social Security and pensions can reduce the pressure on your investment portfolio.
Taxes and Medicare Premiums: Don't overlook these expenses when calculating your retirement needs.
Dynamic Withdrawal Strategies
Rather than locking your retirement plan to a single number, Keen Wealth often uses a combination of adjustable strategies that are tailored to each retiree's personal situation, including:
Guardrails: Adjusting withdrawals up or down based on predetermined “guardrail” metrics such as risk tolerance and the timing of other income, such as Social Security, will balance short-term needs against long-term stability.
The “Bucket” Strategy: Segmenting your assets into different “buckets” based on when you’ll need the money. A common practice would be to use cash and short-term fixed income during market declines to avoid selling stocks when they are temporarily down.
Hybrid Strategies: A mix of guaranteed income streams like Social Security or a Pension and withdrawals from retirement accounts will help to maintain the health and flexibility of both.
Living Confidently in Retirement
Financial security is an important retirement goal. Always having an updated, cohesive financial plan in place is crucial. Regardless of market conditions, you know where you stand and are able to confidently plan for the future. And while no one wants to run out of money in retirement, being too afraid to spend your money and enjoy retirement isn’t the ideal way to spend your Golden Years either.
That’s why our goal at Keen Wealth is bigger than finding one number. We want to help folks feel more confident about their comprehensive financial plan, whether the markets are up or down, and whether they’re facing challenges or celebrating major milestones.
Come visit our office and let’s talk about how you’re feeling about your withdrawal strategy and the goals you’re hoping to achieve before the end of the year.
About Bill
Bill Keen is a financial advisor with over 30 years of industry experience. As the founder and CEO of Keen Wealth Advisors, a registered investment advisory firm, he focuses on providing personalized retirement planning designed to help people thrive before and during their retirement years. With a passion for educating others, Bill regularly blogs about retirement planning, hosts the podcast Keen on Retirement, and has contributed to Forbes, U.S. News and World Report, Reuters, Wall Street Journal’s Market Watch, Yahoo Finance, and other publications. Based in Overland Park, Kansas, Bill and his team work with clients throughout the greater Kansas City area and across the nation. To learn more, connect with him on LinkedIn or visit www.keenwealthadvisors.com.
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