Withdrawing Money in Retirement

Retirement planning is tricky. Not only do we need to save enough money to live on in retirement, but we also have to figure out how much we can withdraw from our nest eggs each year without depleting them too quickly.

It’s a tough problem, and there’s no one-size-fits-all solution. Many look to the “4% rule,” which suggests you withdraw 4% of your nest egg in your first year of retirement and then adjust that for inflation in subsequent years. That assumes a portfolio mix of stocks and bonds, and it’s likely (though not guaranteed) to make your money last for 30 years.

Another approach, suggested by the 1998 “Trinity study” on retirement savings, is to withdraw between 3% and 4% each year from a stocks-and-bonds portfolio to make your money last for 15 to 30 years. Examining stocks and bonds from 1926 through 1995, the researchers found that having bonds makes a nest egg last longer for retirees withdrawing smaller percentages, but that having at least 50% in stocks is best for most portfolios.

Unless you have a huge nest egg, these rates won’t give you a lot each year. With a $300,000 portfolio, for example, a 3% withdrawal would give you $9,000 for the year, while withdrawing 5% would deliver $15,000.

Be sure to factor Social Security income into your retirement plan, and read up on how to maximize those benefits. Consider working a few more years, to save and invest even more, and look into immediate annuities, too, as they can allow you to lock in reliable income.

Many experts recommend being flexible with withdrawal rates: When the economy is booming, withdraw more. When it’s struggling, withdraw less. This is especially true in the early years of your retirement: A big stock market crash early on can lead to your money running out sooner.

This is complicated stuff, so read a lot more about it — and consult a financial adviser. You can find fee-only advisers near you at NAPFA.org.