Withdrawal Rate

Choosing a withdrawal rate is one of the most important decisions in retirement planning. Withdraw too much, and savings may run out; withdraw too little, and the retiree may live more frugally than necessary.

The withdrawal rate is calculated by dividing the annual amount withdrawn by the value of the portfolio. For example, a retiree with a portfolio of 1,000,000 who withdraws 40,000 in the first year has a withdrawal rate of 4%.

A widely discussed guideline, often called the four percent rule, suggests that withdrawing about 4% of a diversified portfolio in the first year, then adjusting that amount for inflation each year, has historically given a high chance of the money lasting around 30 years, based on past US market data. This is a rule of thumb, not a guarantee.

The sustainable withdrawal rate depends on many factors, including how long retirement lasts, investment returns, inflation, the mix of shares and bonds, fees and taxes. Poor market returns early in retirement, known as sequence-of-returns risk, can be especially damaging.

Many retirees adjust their withdrawals flexibly, spending less after market falls, to improve the chances that their savings last.