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Retirement Strategies: How Much Can You Withdraw and Not Outlive Your Money?

Perhaps the biggest unknown when planning retirement financial strategies is how long your money will need to last? No one knows how long they’re going to live so it’s hard to know exactly how much money it will take to make it all the way through retirement without running out of cash.

One strategy that can help you figure this out is to determine how much of your retirement savings you can withdraw each month to meet your living expenses and not deplete your nest egg before you die. You can then plan your retirement budget accordingly.

The 4% Rule

One common rule of thumb has come to be known as the 4% rule. According to this rule, there’s a high likelihood that you can withdraw 4% of your retirement account principal annually and not run out of money in retirement. According to research performed by William Bengen, an MIT grad who became a certified financial planner, a portfolio with a 50-75% allocation of stocks would last 50 years 80% of the time.

In other words, there’s an 80% chance that this portfolio would support a retirement lasting 50 years. Even in a worst-case scenario, the portfolio would support a retirement lasting 35 years. So according to Bengen’s research, an individual retiring at 65 would be virtually assured of not running out of money before turning 100 years old.

Of course, this is just one strategy, and some have tried to debunk it by claiming that withdrawing less than 4% of a retirement account annually is safer. For example, a professor at the American College of Financial Services named Wade Pfau recommends withdrawing no more than 2.4% of a retirement portfolio annually.

Others, however, believe that you can safely withdraw more than 4% annually. This includes Bengen, who recreated his research last year with some small tweaks, including bumping the withdrawal percentage up to 4.5%. Bengen also allocated 50% of the sample portfolio to bonds, 40% to large-cap stocks and 10% to small-cap stocks.

Based on this, he determined that if an individual retired at 60 and withdrew 4.5% of a retirement portfolio annually, there’s a 90% chance that his money would last 30 years, or until he turns 90. If this individual were to spend 50 years in retirement — or in other words, live to age 110 — there’s still a 54% chance that his money would last even this long.

Flexibility is Key

Investment strategist, author and radio host Wes Moss retested the 4% rule last year and his results were similar to Bengen’s research. According to Moss, there’s an 83% chance that a retirement portfolio will last 45 years and a 93% chance it will last 40 years following the 4% rule. Going out even further, there’s a 71% chance a portfolio will last 50 years following the 4% rule, according to Moss.

“Once we veer into the more realistic retirement lengths of 30 or 35 years, you’re edging closer and closer to a 100% chance of retirement savings lasting as long as you do,” states Moss. “In the real world, somewhere in the 4%–5% range works most of the time.”

Moss stresses that retirement planning is not a “straight line” and that there isn’t an exact percentage that works for every retiree, all of the time. These rules are just guidelines and flexibility is the key. Some years you might need to withdraw a little more, and some years a little less, depending on your circumstances.

Moss believes that these guidelines are sustainable “so long as you are willing to make adjustments as needed. Dipping into your nest egg should be flexible, but it needn’t be miserly.”

Give us a call if you have more questions or would like to discuss your particular situation in more detail.



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