Safe Withdrawal Rate

Retirees face a balancing act: withdrawing too much risks running out of money, while withdrawing too little means living on less than necessary. The safe withdrawal rate gives a starting point based on historical or simulated returns.

The best-known estimate is the four percent rule, based on research by financial planner William Bengen in the 1990s using past US market data. It suggests withdrawing 4% of the portfolio in the first year and increasing the amount with inflation each year after. For example, with 1,000,000, the first year's withdrawal would be 40,000. If inflation is 3%, the next year's would be 41,200.

The rule is an approximation, not a guarantee. A safe rate depends on the length of retirement, the mix of investments, fees, taxes and future returns, which may differ from the past. Retiring just before a market fall, known as sequence-of-returns risk, matters a great deal.

Many retirees use flexible approaches, cutting spending after poor years and spending more after good ones, which can support a higher average withdrawal rate.

Note: The four percent rule is the best-known version of a safe withdrawal rate.