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Blog Your guide to financial planning and retirement
August 27, 2024 • 9 minutes
Retirement withdrawal rate is a metric you’ll start to think about as retirement gets closer. For decades, the 4% retirement withdrawal rule has served as a guiding principle for retirees. While this rule of thumb has provided simplicity and reassurance, today’s retirees face new economic realities that benefit from a more nuanced and personalized approach.
The rule suggests that if you withdraw 4% of your retirement savings annually, adjusting for inflation, your savings should last through a 30-year retirement.
When the rule was first proposed by financial planner William Bengen in 1994, he analyzed rolling 30-year periods, starting from the 1920s, to determine a safe withdrawal rate that would have survived even the worst market conditions, including the Great Depression and high inflation periods – assuming a diversified portfolio.
Begin with the end in mind. – Stephen R. Covey
The 4% rule was conceived as a way to get you to the end goal of fully funding your retirement. And, from that perspective, it is a decent framework.
However, it is just a rule of thumb and should not be considered a full-fledged retirement strategy.
The financial landscape has shifted since the 1990s when the 4% rule was developed. While interest rates are higher now, they are still lower than when the rule was developed. Plus, increasing longevity and unpredictable market conditions strain the sustainability of a 4% withdrawal rate.
For example, a few years of significant market downturn early in retirement, often referred to as sequence of returns risk, can deplete savings more quickly than anticipated. Additionally, retirees today might live longer than previous generations, potentially requiring their savings to stretch further.
These days financial planning experts suggest aiming for a withdrawal rate of between 3-5%. However, it is much better to understand your personal goals, assess what is right for you, and come up with a personalized retirement withdrawal strategy.
NEW: See your retirement withdrawal rate in the Boldin Planner (part of your Financial Wellness Dashboard)!
The 4% rule isn’t ideal for today’s economy. More importantly, it just isn’t the best way to achieve your retirement goals of living a satisfactory life and enjoying lifelong financial security.
Retirement withdrawals should be considered in light of your personal financial situation. You should look at your spending needs (and wants) as well as what sources of retirement income you have as well as other goals for limiting taxes and leaving an estate to heirs.
Let’s explore how to identify a personalized retirement withdrawal rate:
The most important thing you can do if you want a secure retirement is to visualize the future you want, and budget for it. You want to project all of your spending needs for as long as you are in retirement. How you want to spend your money is why you withdraw.
Your projected spending should reflect your essential living expenses, such as housing, healthcare, and daily necessities, as well as your discretionary spending on activities like travel, hobbies, and entertainment.
The Boldin Planner will help you project your spending in meaningful ways:
And, here are 9 ways to project retirement spending and why it is so important to get this right.
Retirement withdrawals are unlikely to be your only source of retirement income. You will likely have Social Security, perhaps a pension, and maybe even other investment or passive income sources.
This income offsets your need for withdrawals from savings.
The gap between your retirement spending and your retirement income is what you are projected to need to withdraw from savings.
In the NewRetirement Planner, you have three options for dealing with the gap in your spending and income.
On the My Plan > Money Flows > Withdrawal Strategy page, you can project withdrawals based on:
If you want to leave behind a portion of your savings to heirs, then you may want to exclude this amount from your projection. The NewRetirement Planner enables you to set a financial legacy goal which will be excluded from the Maximum Spending strategy. And, if you select the Spending Needs or Fixed Percentage strategy, you have the ability to protect specific accounts.
Taxes play a significant role in retirement withdrawal strategies, as different types of accounts are taxed differently. Withdrawals from traditional IRAs, 401(k)s, and other tax-deferred accounts are typically subject to income tax, while Roth IRA withdrawals are tax-free if certain conditions are met.
Required Minimum Distributions (RMDs) from traditional accounts begin at age 73, or later. And, failing to take them can result in hefty penalties. To manage your tax burden, you may want to strategically withdraw more from particular accounts in some years, such as when you’re in a lower tax bracket. And, take out less in other years when higher income subjects you to higher brackets.
This can also involve converting some traditional IRA funds to a Roth IRA, a process known as a Roth conversion. While you’ll pay taxes on the conversion amount, it can reduce future RMDs and allow for tax-free withdrawals later. By carefully timing your withdrawals and considering Roth conversions, you can optimize your tax situation and make your retirement savings last longer.
Crafting an effective retirement withdrawal strategy requires a thoughtful balance between meeting your immediate spending needs and achieving your long-term financial goals. This task is made easier through use of the Boldin Planner.
By carefully estimating your projected income and expenses, adjusting for taxes, and considering legacy goals, you can create a plan that supports both your current lifestyle and your future objectives.
Strategic decisions, such as varying your withdrawal order & amounts and utilizing Roth conversions, can help manage your tax liability and extend the longevity of your savings. Regularly reviewing and adjusting your strategy ensures that you stay on track and can enjoy a financially secure and fulfilling retirement.
Retirement withdrawal rate decisions work best when they flex with markets and taxes. You set a starting rate. Then you adjust for brackets, IRMAA, fees, and sequence risk. You coordinate with Social Security timing and RMD planning. Finally, you model several guardrail paths in the Boldin Retirement Planner and pick the smoothest cash-flow track.
Start with a guardrail approach instead of a fixed number. You set a target rate, then raise or trim after big market moves. You also factor taxes, fees, and healthcare. Use the Boldin Retirement Planner to compare paths and choose the rate that funds spending while protecting long-term growth.
Taxes alter net cash flow. Pre-tax withdrawals raise ordinary income. Capital gains bands affect taxable sales. IRMAA tiers can lift Medicare costs. Therefore, test sequences that blend taxable, pre-tax, and Roth. Boldin’s framework for ordering withdrawals shows how to keep lifetime taxes lower.
Often yes, because you preserve tax-advantaged growth. However, you may pull some pre-tax funds early to shrink future RMDs. You might also harvest gains in a 0% band. Since brackets and premiums interact, model both orders in the planner and choose the path with steadier after-tax income.
Early market losses can permanently dent a plan if withdrawals stay fixed. To reduce damage, hold a cash reserve, pause inflation raises after bad years, and rebalance. You can also trim the rate temporarily. Then resume after recovery. This keeps the portfolio invested while funding core needs.
Conversions raise taxes today but can lower future taxes and increase flexibility. Convert in low-income years while staying under IRMAA thresholds. Coordinate with capital gains, charitable gifts, and Social Security timing. For rules and timing nuance, see Boldin’s guide to the two Roth 5-year rules.
RMDs force taxable income later. Many retirees draw modest pre-tax amounts in their 60s to reduce future RMDs and smooth taxes. Then they preserve Roth for flexibility. For tactics and timing, review Boldin’s guide to minimizing RMDs and test scenarios inside the planner.
Diversification and costs matter. A balanced mix can support steadier withdrawals across cycles. Higher fees raise the hurdle. Review basic principles in the SEC’s overview of asset allocation. Then align allocation with your guardrails so withdrawals stay resilient as markets shift.
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The 4% rule is now the 4.7% rule, but safe withdrawal rates are no substitute for a holistic retirement plan.
