Planning for retirement means making your savings last—ideally, for the rest of your life. One of the most critical questions retirees face is: How much can I safely withdraw from my retirement savings each year without running out of money? This is where the concept of a safe withdrawal rate comes into play.
Understanding the Safe Withdrawal Rate
The safe withdrawal rate refers to the percentage of your retirement portfolio you can withdraw annually, adjusted for inflation, without depleting your savings too early. It aims to strike a balance between preserving your wealth and maintaining your desired lifestyle.
The concept was popularized by financial planner William Bengen in the 1990s. After analyzing decades of historical market data, Bengen concluded that retirees could safely withdraw 4% of their initial portfolio per year, adjusted for inflation, over a 30-year retirement. This became known as the “4% rule” (Bengen, 1994).
Is the 4% Rule Still Reliable?
The 4% rule is a helpful starting point, but it isn’t one-size-fits-all. Since Bengen’s study, market conditions, interest rates, and life expectancies have evolved. Here are a few reasons why retirees today may need to adjust their strategy:
- Longer Lifespans: Many people now live well into their 90s, making a 30-year retirement potentially too short an estimate.
- Lower Bond Yields: With historically low interest rates, the returns on bonds—once a stable income source for retirees—have diminished.
- Market Volatility: Increased market uncertainty means that the timing of your withdrawals (known as sequence of returns risk) could have a bigger impact on your portfolio.
A study by Morningstar (2023) suggests that a more conservative withdrawal rate—closer to 3.3%—might be more prudent for today’s retirees, especially in low-return environments (Benz, 2023).
Factors That Affect Your Safe Withdrawal Rate
There’s no universally “safe” rate for everyone. Your ideal withdrawal rate depends on several personal and economic factors:
- Retirement Length: Retiring at 60 vs. 70 makes a big difference. A longer retirement usually requires a lower withdrawal rate.
- Portfolio Composition: A well-diversified mix of stocks, bonds, and other assets can help manage risk and improve returns.
- Spending Flexibility: Can you reduce expenses during market downturns? Flexible spending improves sustainability.
- Other Income Sources: Social Security, pensions, and annuities can supplement withdrawals and reduce pressure on your portfolio.
Dynamic Withdrawal Strategies
Instead of sticking to a fixed percentage, some retirees opt for dynamic withdrawal strategies, which adjust withdrawals based on market performance. A few common approaches include:
- The Guardrail Strategy: Adjusts spending if your portfolio moves outside a set range.
- Percentage-Based Withdrawals: Withdraw a set percentage each year based on the current portfolio value.
- Floor-and-Ceiling Rules: Set a minimum and maximum annual withdrawal to limit lifestyle swings.
These flexible strategies can help mitigate risk while allowing retirees to enjoy more spending in good market years.
Final Thoughts
The safe withdrawal rate is a cornerstone of retirement planning—but it’s just one part of a comprehensive financial strategy. Whether you’re nearing retirement or already enjoying it, it’s important to regularly reassess your plan as your circumstances and the market evolve.
Our team at Alaska Wealth Advisors can help tailor your withdrawal strategy to your unique goals, risk tolerance, and financial situation.
Nikki Squires
Associate Financial Advisor
Need help planning your retirement income? Contact our team of advisors to create a personalized withdrawal strategy that keeps your retirement on track—no matter what the markets do.
Alaska Wealth Advisors, LLC is an investment adviser registered with the U.S. Securities and Exchange Commission. Registration does not imply a certain level of skill or training. More information about Alaska Wealth Advisors’ investment advisory services can be found in its Form ADV Part 2 and/or Form CRS, both of which are available upon request.
References
Bengen, W. P. (1994). Determining Withdrawal Rates Using Historical Data. Journal of Financial Planning. FPA Journal – The Best of 25 Years: Determining Withdrawal Rates Using Historical Data
Duquette, CM (2023). Revistiign William Bengen’s ‘SAFEMAX’ Portfolio Withdrawal Rate. Revisiting William Bengen’s ‘SAFEMAX’ Portfolio Withdrawal Rate | Financial Planning Association
Benz, C. (2023). The State of Retirement Income: Safe Withdrawal Rates. Morningstar. https://www.morningstar.com/retirement/state-retirement-income-2023-safe-withdrawal-rates Retirement_Income_2023_Final.pdf
