How much can you spend in retirement?
Most people spend years saving for retirement. Then, when the time comes to begin spending their savings, they have no strategy in place.
Many studies—including our own research*—have shown that successful retired investors often don’t spend much of their retirement savings, and their money continues to grow. It’s not a terrible problem to have, but it could mean these investors are being overly frugal in retirement because they’re not sure how much they can “safely” spend.
It’s crucial to have a strategy for accumulating retirement assets. Equally important is a strategy to withdraw from your retirement savings. Your withdrawal strategy should accomplish 2 often-competing goals:
- Having enough money to support your desired lifestyle.
- Ensuring there’s enough left for the future, including any money you plan to leave to heirs.
There are several ways to successfully withdraw from your retirement savings. Our advisors can help you determine which approach might work best for you.
Traditional retirement withdrawal strategies
The dollar-plus-inflation strategy calls for you to spend a percentage of your portfolio the first year and adjust that amount in subsequent years based on inflation.
Here are some things to know about this strategy:
- The “4% rule” is a popular example of the dollar-plus-inflation strategy. Here’s how it works. You withdraw 4% of your portfolio in your first year of retirement. Then, in each subsequent year, the amount you withdraw increases with the rate of inflation. If you don’t expect your expenses to change much throughout retirement, this strategy can help ensure you’ll be able to cover your yearly costs for as long as the portfolio lasts (goal 1).
- It ignores market conditions, so you could end up running out of money (in down markets) or spending much less than you can afford (in up markets).
- It could be best for you if you plan to maintain a steady level of spending from year to year.
The percentage-of-portfolio strategy calls for you to spend a fixed percentage of your portfolio every year. This strategy:
- Gives you confidence of achieving goal 2—not running out of money.
- Results in yearly spending amounts that are completely market-driven and could fall short of what you need to live.
- Could make sense for you if your main concern is ensuring you don’t deplete your portfolio and you can adapt your budget to a wide range of spending levels.
As the name implies, a fixed-dollar withdrawal strategy involves taking the same amount of money out of your retirement account every year for a set time then reassessing. It can:
- Provide a predictable income stream, which can be helpful for budgeting and planning. You’ll know exactly how much money you’ll be withdrawing each year.
- Add a level of simplicity. Fixed-dollar withdrawals are relatively easy to manage, and you don’t need to constantly adjust your withdrawal amounts.
- Leave you exposed to the risks of inflation.
With a fixed-percentage withdrawal strategy you withdraw a fixed percentage of your retirement portfolio each year, regardless of market performance. This can be a good way to ensure that you don’t outlive your savings.
Here are some of the pros and cons of a fixed-percentage withdrawal strategy:
- It’s easy to understand and implement.
- This system naturally adjusts your withdrawals to respond to market fluctuations.
- Your income changes from year to year, so it can be difficult to make financial plans.
Finally, there’s the withdrawal “buckets” strategy, which divides your retirement savings into 3 buckets: short-term, intermediate-term, and long-term.
- The short-term bucket should contain money you’ll need to live on for the next 3–5 years. This money should be invested in safe, liquid assets, such as cash, cash equivalents, and short-term bonds.
- The intermediate bucket should contain money to cover expenses for the next 5–10 years. This money can be invested in longer-term, high-quality bonds and certain stocks, including utilities and REITs.
- The long-term bucket should hold investments that will continue to grow throughout your retirement. You can invest this money in stocks and long-term bonds.