Safely withdraw from retirement savings

How Much Can You Safely Withdraw From Your Retirement Savings?

/ Retirement Tax Planning / By

For a 30 year retirement with a diversified portfolio, most research supports a starting withdrawal rate between 3.5 and 4 percent in year one, adjusted for inflation each year after. This is commonly called the 4 percent rule, and it was designed to survive the worst sequences of market returns in U.S. history since 1926. The right rate for your specific situation depends on spending flexibility, other income sources like Social Security, portfolio diversification, and expected retirement length, which is why a year by year withdrawal plan is more reliable than any single rule of thumb. Flexible retirees may be able to sustain 5 percent or more; retirees with no flexibility may need to start below 4 percent.

Key Takeaways:

– The 4 percent rule was an academic worst-case stress test, not a recommended plan.
– A retiree with $1 Million can withdraw $40,000 in year one under the 4 percent rule, then adjust for inflation each year.
– Spending flexibility is the single biggest factor in extending portfolio survival.
– Guaranteed income from Social Security and pensions reduces reliance on portfolio withdrawals.
– Sequence of returns risk in the first 5 years of retirement matters more than the average return.
 

What is the 4 percent rule?

The 4 percent rule comes from research by financial planner William Bengen in 1994. He studied historical market returns going back to 1926 and asked what withdrawal rate would have survived the worst 30 year stretches of U.S. history. The answer was approximately 4 percent.
 
The rule says: in year one of retirement, withdraw 4 percent of the portfolio. In each year after, adjust that dollar amount for inflation, not 4 percent of the new balance. So if year one is $40,000 and inflation is 3 percent, year two is $41,200 regardless of what the portfolio did.
 

How much can I spend per month in retirement?

 
The monthly spending number comes from combining three sources of retirement income:
1. Guaranteed income (Social Security, pension, annuities)
2. Portfolio withdrawals at a sustainable rate
3. Any part-time work or other income
 
Example. A couple has $1.5 Million saved, will receive $4,000 per month in combined Social Security, and has no pension. Using a 4 percent portfolio withdrawal rate:
 
– Social Security: $4,000 per month
– Portfolio: $1.5M x 4% / 12 = $5,000 per month
– Total: $9,000 per month before taxes
 
After federal and state taxes, the spendable amount is closer to $7,500 to $8,000 per month for most retirees in this scenario. The right number depends on filing status, state, and the mix of account types feeding the income. See Link For Blog 12 for the discussion on withdrawal sequencing.
 

Why is the 4 percent rule criticized?

Three main criticisms:
1. It assumes a flat real spending pattern. Real retirees spend more in early retirement, less in middle retirement, and more again late in retirement (healthcare).
2. It ignores taxes. $40,000 from a Roth IRA is not the same as $40,000 from a traditional IRA.
3. It assumes no flexibility. Real retirees can cut spending in bad years, which dramatically improves outcomes.
Should you use a higher or lower withdrawal rate?
 

Several factors push the safe rate higher:

– Flexibility to cut spending in down years
– Other guaranteed income that reduces reliance on the portfolio
– A diversified portfolio (not just stocks and bonds)
– A shorter expected retirement (under 30 years)
– A willingness to leave nothing behind for heirs
 

Several factors push the safe rate lower:

– A 35 to 40 year retirement (early retirees)
– High fixed expenses that cannot be cut
– A portfolio concentrated in one asset class
– Significant sequence risk in the first 5 years (see Link For Blog 5)
– A goal of leaving substantial assets to heirs or charity
 

How long does retirement actually last?

For a couple retiring at age 65, the Social Security Administration projects roughly a 50 percent chance that one spouse lives past 90. Planning for 30 years of retirement is now standard. For early retirees, 35 to 40 years is realistic.
 

What is a guardrail withdrawal strategy?

A guardrail strategy adjusts withdrawals based on portfolio performance. If the portfolio rises significantly, the retiree can withdraw more. If it falls significantly, the retiree withdraws less.
 
This dynamic approach often allows higher average withdrawals than the 4 percent rule while maintaining the same probability of running out. The trade-off is income variability year to year.
 

How does Social Security affect safe withdrawal rates?

Social Security and pensions provide inflation-adjusted lifetime income that doesn’t drop in market declines. The more guaranteed income, the lower the portfolio withdrawal needs to be.
 
For 2026, maximum Social Security at full retirement age is $4,152 per month, or roughly $49,824 per year, per the Social Security Administration. A couple receiving combined Social Security of $90,000 per year and needing $150,000 total income only needs the portfolio to produce $60,000.
 

What is the right withdrawal rate for early retirees?

For someone retiring at 55 and planning for a 40 year retirement, the safe withdrawal rate drops below 4 percent. Most research suggests 3 to 3.5 percent for a 40 year horizon.
 
The reason is simple. The longer the retirement, the more time exists for both inflation to erode purchasing power and for a major market decline to occur during the withdrawal period.
 

How do taxes affect withdrawals?

The 4 percent rule talks about gross withdrawals. After-tax purchasing power depends on the source:
– Roth IRA withdrawals: $40,000 gross = $40,000 net
– Traditional IRA withdrawals: $40,000 gross might be $30,000 to $34,000 net depending on bracket
– Taxable brokerage withdrawals: $40,000 might be mostly principal (no tax) or include capital gains (lower tax rates)
 
A retiree with all traditional IRA assets effectively withdraws less than a retiree with mixed account types at the same gross withdrawal rate.

Common Mistakes:

1. Treating the 4 percent rule as a plan instead of a starting point
2. Ignoring taxes when calculating “how much can I spend”
3. Maintaining the same withdrawal rate in a major market decline
4. Failing to plan for changing spending patterns through retirement
5. Not adjusting strategy as retirement progresses

Frequently Asked Questions

Can I withdraw 5 percent safely?

Possibly, if you have spending flexibility, significant guaranteed income, or a shorter expected retirement.

A 3 percent withdrawal rate is highly conservative. The portfolio is very likely to grow throughout retirement.

Yes. Even small spending cuts in down yearsdramatically improve long-term portfolio survival.

No. The 4 percent rule applies only to portfolio withdrawals. Social Security and pensions are separate.

Most plans never reach this point if monitored and adjusted. If a portfolio is depleting faster than expected, the response is usually spending adjustments, not panic.

Sources

– Social Security Administration: Life Expectancy
– Social Security Administration: Maximum Benefits
– IRS: Retirement Plan Distributions

 

About the Author

Kurt Supe is a CPA and Senior Partner at Creative Financial Group, an Indianapolis-based retirement planning firm. CFG has worked with retirees and pre-retirees for nearly 30 years, managing over 600M dollars in assets across 1,500 households. Kurt contributes to MarketWatch on retirement and tax planning topics.

This is not financial advice. Consult a qualified professional before making any financial decisions. Scenarios are hypothetical and for illustrative purposes only.

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