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RETIREES ENDLESSLY debate how best to draw down their retirement savings, and yet it all comes down to two simple rules: Don’t spend too much each year, and don’t sell stocks during down markets.
How do we put these two rules into action? Retirees can pick from a host of withdrawal strategies, including the five popular choices listed below. You’d likely fare just fine with any of the five strategies—but that doesn’t mean you shouldn’t pick carefully.
1. Four percent rule. This rule specifies that retirees should spend 4% of their nest egg’s value in the first year of retirement, thereafter stepping up the annual sum withdrawn with inflation. History suggests that, with this approach, retirees shouldn’t run out of money over a 30-year retirement.
To avoid selling stocks during rough markets, it’s important to have at least enough in conservative investments to cover five years of portfolio withdrawals. For extra safety, some folks might want to hold seven or even 10 years’ worth.
2. Fixed withdrawal rate. Instead of the 4% rule, I’ve suggested in the past that retirees opt for perhaps a 5% withdrawal rate, and then each year withdraw that percentage of their portfolio’s beginning-of-year value.
This approach has two benefits. First, our spending is tied directly to our portfolio’s performance, and we could potentially spend more if the financial markets have great returns. Second, we’d never run out of money, because we’re always withdrawing a fixed percentage of whatever remains.
3. Required minimum distributions. Government-mandated withdrawals from retirement accounts involve drawing a rising percentage from these accounts each year as you advance through retirement and your life expectancy shortens.
Experts have suggested that retirees take these withdrawal percentages and apply them to their entire portfolio, including both retirement-account and taxable-account money. The IRS has a variety of tables for required minimum distributions. Those intrigued by this strategy should probably use the so-called uniform lifetime table.
4. Emptying buckets. There’s no universally agreed-upon bucket strategy, but the notion is that retirees employ perhaps three buckets of varying investment riskiness. These might include a low-risk bucket to cover spending over the next five years, a medium-risk bucket holding another five years of spending money, and a high-risk bucket that’s mostly invested in stocks.
As the low-risk bucket empties, retirees might refill it using dividends, interest and investment sales from the other two buckets. Many find the strategy comforting, because it offers the reassurance that spending money for the years ahead isn’t at risk of being devoured by a stock-market crash.
5. Setting a floor. How much do you spend each month on fixed living costs, such as housing, insurance premiums, utilities, groceries and so on? Between Social Security, dividends, interest, annuity income and any pension, you might aim to have enough regular income to cover at least these fixed costs, so a stock market crash wouldn’t derail your ability to pay the bills.
What about discretionary expenses, such as eating out, gifts to family and travel? For these costs, retirees could arrange even more regular monthly income. Alternatively, we might have a separate pool of money that’s invested more aggressively and hence offers the chance for growth. This will offer longer-term inflation-protection, though it also means we may need to trim discretionary spending during bad financial markets.
Which of the above strategies should folks favor? Each will give you slightly different annual income. Still, don’t assume the strategy generating the most spending money is necessarily the best.
Remember, the five withdrawal strategies are all layered on top of a retiree’s basic mix of stocks, bonds, cash and other investments. To be sure, we might tweak that investment mix to fit better with our chosen withdrawal strategy. Still, if we opt for a higher allocation to stocks, we’ll likely enjoy some combination of greater annual income and larger portfolio values over the course of our retirement, no matter which withdrawal strategy we use.
So, how should we pick among the various withdrawal strategies? I’d view them as behavioral aids, helping retirees to figure out how much they can spend each year and making it easier to cope with wild financial markets.
Think of these strategies as similar to dollar-cost averaging. While dollar averaging comes with some mathematical justification, it’s really a behavioral prop, making it emotionally easier for folks to buy into the stock market. There’s nothing wrong with that. But we shouldn’t kid ourselves: Folks may tout dollar-cost averaging as a superior way to invest, but it’s mostly about supplying the discipline we need.
Ditto for the withdrawal strategies outlined above. They’re just devices for taking the portfolio we have and generating income in a way we find emotionally palatable. Which strategy do you find most appealing? That’s probably the right one for you.
Jonathan Clements is the founder and editor of HumbleDollar. Follow him on X @ClementsMoney and on Facebook, and check out his earlier articles.
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Here’s my strategy:
Step 1: I started by calculating my total usable income from my last year of work. Then, I multiplied that amount by 1.03% to 1.05% to determine a reasonable income goal for my retirement years, adjusting for inflation. For example, if my target income was $5,000 per month (a hypothetical, round number), that would serve as my inflation-adjusted retirement income goal.
Step 2: Next, I calculated my total income from Social Security and other sources. Let’s say this came out to $3,000 per month. To meet my income goal, I identified a $2,000 per month gap that needed to be covered by withdrawals from my retirement savings.
Step 3: I set up an automatic transfer of $2,000 per month from my Vanguard retirement accounts into our bank account.
This approach allowed me to replicate my pre-retirement monthly income, adjusted for inflation. Interestingly, the $2,000 monthly withdrawal represented 3.11% of my total retirement savings, which aligns with the safe withdrawal rate I had planned for.
Note: the only real number in this example is the 3.11% withdrawal rate.
Thanks for another thoughtful article
It goes without saying here with the HD readers that we need to know how much we need before we spend, so the most important part of any withdrawal strategy is a detailed budget. Our detailed budget shows us that our SS benefits will meet most of our spending needs. We have been using some forms of the buckets strategies until we read Laura E. Kelly’s article about laying down a retirement floor, https://humbledollar.com/2024/09/laying-down-a-floor/.
There are two major concerns in our household, one, my spouse’s poor health status because of her chronic but serious condition; and two, ever present of inflation. Since our SS income could meet our spending needs, we decided to purchase 30 years TIPs ladder in my Roth IRA account to match the lesser SS income in case one of us will pass sooner rather than later and the surviving spouse will be in a single filing tax status but still be able to meet our every day needs, and combat the eroding effect of inflation.
After we have laid down our spending floor, we are at peace with a more aggressive equity investment strategy both in our Roth & taxable accounts. Since we also have converted all our tIRA into Roth because we have no need for our RMD to spend, rather want to build up our legacy accounts for our three grown daughters and granddaughter. We have also set aside an account to invest for our future long term care needs for the surviving spouse. We can sleep pretty well whatever happened to the stock market.
I’m big on simplicity so I like #2 the best. I figured out that we spent 4.85% last year so I’m feeling pretty good.
Thanks for the review. Turns out I’m a mix of many of these.
I use the %4 rule to see if I way off base (apparently not).
I’m probably actually closest to using the fixed withdraw rate …
the monthy “retirement paychecks” total is less than %4 of
current assets, and that difference + anticipated income gives
me a good feel for the head-room (larger trips, home imporvments, etc).
Was looking hard at the RMD method (Steve Vernon’s “Don’t Go Broke In Retirement”) before some major medical issues threw planning into confusion 6 weeks after retiring 🙁 … I will probalby get back to it.
The RMD tables are just another way of setting the right “safe” level.
There is a healthy dose of bucketing in there too. One thing I appreciated about his approach was it was designed to work with the realities that many people with more modest savings face in retirement.
I’m using buckets conceputially to make sure the asset mix is right per the high/medium/low + timeframe categories. Realities of where the assets are (taxable, tax deferred) are a little messy/sub-optimal for the next few years because I’m playing the keep-income-low-before-65-for-ACA-credits game.
Thanks for the list Jonathan. It’s useful for reviewing where I am, what I’m doing and why … after some confusion set in.
I was fortunate to figure out the “compounding thing” and “invest early and often” in my early 20s. I’m turning 80 in 2 months, but have longevity in my genes, so we’re still a little heavy in stock funds. (My parents and grandparents lived into their mid 90s.). I retired as a pharmacist in 2010; so far so good.
Here’s what Quicken tells me what we have (rounded) – 8% cash and money market funds, 41% stock funds, 6% tax exempt bond funds, 25% annuities, and 20% house and lot. SS, bond fund dividends, and annuities cover expenses.
Normally, I reinvest dividends and long term capital gains. However, if the stock funds are higher at the end of the year than they were at the beginning, I take both and move them to checking or money market fund depending on if we want to save or splurge on something in the coming year. (We’re splurging this year:)
Does this all make sense for my situation?
I have also set aside a multi-year RMD reserve to avoid having to sell into a falling market. I first did this a year ago and then again just before the recent market high. Better lucky than good, I suppose, but your suggestion is sound, nonetheless.
Luckily, all these methods would be way more than we need (/humble brag). So, I’m just trying to empty the smaller accounts from early career to simplify things and reduce future RMDs.
I’m fortunate to be in this situation, too. Like you, I’ve emptied the small accounts and am trying to reduce future RMDs. For me, thinking about the proportions of my spending, and hence, withdrawals, is more useful. Roughly a third goes to taxes, another third to charity, and one third is for expenses. I feel I am living my best — if not simple life — and whatever is left at the end will go to charity.
My wife and I use the Federal Income Tax Standard Deduction in conjunction with the Senior Tax Credit–for individuals 65 and over–which, automatically accounts for the quasi-Cost-of-living adjustment (that somewhat off-sets the cost of inflation.)
For tax year 2024 we withdrew:
Married Filing Jointly $29,200
Senior Tax Credit for Married Seniors $1,550
Total $30,750
Notes:
1. We only take a withdrawal when we have a profit.
2. And we put the withdrawal(s) in a high-yield savings account; that way when the market goes down, we have money set aside to riding out the markets downturns.
3. Once we reach RMD age (75 for us) we’ll switch to withdrawing the annual RMD amount.
Out of the 5 you listed, I like #2 (Fixed withdrawal rate 5%) and #3 (RMD) the best. I like these the best because I feel they will lead a person to spend more during their retirement or help the person retire sooner. I feel money is a tool to pay the bills of course, but to also create memories and to help others (family and charities) while the person is alive. The 4% rule, from what I read from other sources, is really conservative and in a majority of cases the person leaves behind more money after they pass than what they started retirement with. I am not against this if that is one’s goal, however, my goal is to leave some money behind for my kids and charity, but my ultimate goal is to spend most of it during my retirement while I am alive to help my family (and to create memories with my kids/wife) and to help charities. I rather take a chance of running out of money (e.g., 20% chance of failure vs 5% chance of failure/running out of money in retirement) than running out of time (by working longer than necessary) or creating less memories because of being too conservative. But as many say, personal finance is personal, so my goal may be too aggressive for some 🙂
On a similar note, has anyone heard of Nick Davis and his Risk-Based Guardrails Withdrawal strategy? Here is a link to him describing it: (312) The Withdrawal Strategies Rich Retirees Use (That Poor Retirees Don’t) – YouTube. What are your thoughts?
Thanks Jonathan for this article!
Hey, Fred, I agree with you on everything, especially thanking Jonathan for this article. Since you already posted what I was thinking while reading the article, I’ll just say thanks to you too! 😊
Thank you, Jonathan. I read the article twice, but then when I started reading the comments, got kind of confused. I was wondering if you thought which of the strategies you mentioned would be the simplest to implement? This year we are doing 4%, but not sure that is the simplest? It is our first year to draw. Last year we sold some appreciated stock. We are middle class. Chris
I believe all can be reasonably simple. I think you need to ask yourself, what’s most important to you? Predictable annual income? Inflation protection? No risk of running out of money? Protection against rough markets? All offer these in different degrees, and you need to pick the withdrawal strategy that offers the combo you like the most.
Thank you, Jonathan. I will give some of those a thought. Luckily, our SS/pensions provide a decent floor for basic expenses like you talked about above so we don’t have to chase high returns for what we have. But we do need to think about things like inflation and we would like to travel some. Chris
the purpose of investment to me is a good night’s sleep. knowing the goal is imperative to maximize effectiveness; what do you want?
for some it would be the trappings of success, the car the house the clothes the watch…to create a mirror to view yourself as a winner..
for others it might be a legacy to pass to others reducing their anxieties about making ends meet..spending little but creating a hoard for others..
many of us will take a middle path of some to our successors and some as reward; little luxuries…
the key to the speculations is building a nest egg to support these ideations..money is freedom and opportunity and when you have you own comfortable multiple of that then you might relax…. and the funny part it is a reasonable goal to develop that nest egg. but it takes, in the absence of bizzare luck (lottery?) time…the currency we can’t print more of.
when we get there..then all strategies are open..make the last check in life bounce to a possibly self sustaining or even growing asset bundle. again, what are your goals? this article is a conceit, a vanity; but a great one..having the bucks to have this problem is a rare and lucky occurrence…an economy and a nation that will support these aspirations at these levels is amazing…let us give thanks.
sleep well….
You are so right about dollar cost averaging into investments. I do use it as an emotional crutch now that I am not employed and putting money into my retirement account. It is not the most effective but it helps me mentally to stay in the market during bad times.
I’m in the planning stage, and I’ve seen something called the Endowment Strategy, you start taking 5% and then adjust by taking 70% of the prior year plus 5% of the current portfolio value.
At most you’re drawing 5% and it’ll ratchet down withdrawals if your portfolio goes awry. You can also set a floor with this method. It also seems to work exceptionally well if you have good pension/SS/annuity income, as you don’t actually have to spend the amount generated, but it lets you know that you can if you want to.
The strategy was developed to let Uni’s calculate how much of their endowment they can spend in a year without causing rapid wide swings. When I fiddle with it, it seems more stable than you would expect, probably because like 80% of bear markets are over in 4 years. And if you have at least 20% in bonds the time frames are more favorable.
Any thoughts?
I’m intrigued, but I also fear I’m missing something. You write that “you start taking 5% and then adjust by taking 70% of the prior year plus 5% of the current portfolio value. At most you’re drawing 5%.” Surely you’d end up taking more than 5% of the current portfolio value?
I’ve been following the endowment rule for a while now. I believe it originated at Yale. The basic recommendation is to average the previous 12 quarters of your portfolio value and multiply by 5% to arrive at your annual spend rate. Being a little more conservative, I use 4% as the guide. It does result in a smoother spending rate. For instance in the last four years, my “recommended” annual spend rate only declined once and by less that $100.
Another observation: My portfolio reached its all time high in the 4th quarter of 2021 and declined 19.5% by quarter 3 of 2022 and yet the recommended spend rate actually increased during that period. It seems to avoid major spending shocks either to the up or down side by virtue of the smoothing formula. Hope that helps clarify a little.
Thanks – I hadn’t heard of this plan, and we started a scholarship fund a few years ago and trying to figure out the best way for it to both grow and provide scholarships for as many years as possible.
Since all of the money is not required to be spent each year, I’ve wondered about a strategy that spends less in a down year, and this formula might be a good way to do that.
At retirement from teaching in 2021 at age 70 my portfolio was all in Vanguard: roughly 30% stock index funds, 65% bond index funds, 5% cash reserves. The bond index funds are all in my IRA: intermediate-term treasurys and short-term TIPS. My plan has been to use a rising glide path, taking RMDs from the bond funds. I would budget how much to use from the RMD for expenses and invest the rest in the index-adjacent tax-managed stock fund in my taxable account. The other stock funds are mostly in the Roth IRA, along with a small portion in the IRA and now building up in the taxable account. My stock funds are now up to 44% of the portfolio.
How much to budget? I wanted something simple. I originally intended to follow the plan in Bud Hebeler’s article “Marriage of two simple planning methods gets happy results” on his AnalyzeNow website.
Then I landed on Larry Sayler’s article “Our Exit Strategy” here on HumbleDollar. Having Social Security, a SPIA, and eventual payout from a QLAC, I felt comfortable reducing the 3% in his plan to 2.5%. So far, so good. Thanks, Larry!
Thanks so much for the reference to my article. I appreciate it. I am glad you found it helpful.
To save others time, here is my method. It is much like Jonathan’s #2, except instead of using a fixed percent of the prior year-end balance, I apply the fixed percent to the average of the last three year-end balances. This smooths out the ups and downs of the withdrawals.
It meets my three criteria – simple, responsive to market returns, and financially conservative. As Jonathan points out, by using such a method, one can’t run out of money.
I use 3%. You find 2.5% adequate. I would be ok with 4%. Even 5% should work fine. I am not comfortable with 5% because it reduces the amount we will have in our final years, when our needs for health care might be significant.
As for spending, I’m using #2, 3 and 4. I’m carrying cash so I avoid selling in down markets, I use RMD mandates as the floor and I’ve been increasing my withdrawals toward that 5% number. Both I and my spouse have saved, she’s a few years away from RMDs and we both have Long Term Care insurance. Our portfolios are pretty much on auto pilot. Using Monte Carlo analysis we have a 99% success rate to the younger’s age 99.
Another good article. FWIW, I’ve been following and enjoying your articles for decades, going back to your print column at the WSJ. Sad to read of your health issue. We share one thing. In 2022 I became gravely ill, was diagnosed with a rare, inoperable 4th stage cancer with an about 15% survival rate. After two years of intense treatments, I’m stable. Best wishes.
Glad you’re stable. Best wishes for the journey ahead.
Thanks, Jonathan.I’m 71 and like many HD folks, am better at saving than spending. I like the idea of taking up to 5% each year (subtracting Vanguard’s 30 basis points adviser fee first) but . I bet I’m not the only one who has a couple of ‘extra buckets’ that help me mentally gauge my discretionary spending. I set up a donor advised fund –despite Vanguard’s 60 basis points cost– to help me track and stay on target to help where I can. And I have a bucket for ‘surprise extras’. The elephant in the room for spending, of course, is unexpected major medical and/or longterm care costs. My mom had an 11 year dementia journey. It exhausted her ample savings. She still had her pension and social security, but that only covered 50% of her last year. It feels impossible to plan for ‘worst case longterm scenarios’ other than living will and health proxies and making choices to refuse anything other than quality of life treatments in the event of terminal diagnoses.
Thank you. If I ever get the opportunity to again speak at a retirement planning session, I will use your recommendation by highlighting the two rules of thumb, “Don’t spend too much each year, and don’t sell stocks during down markets”, and attribute it to you.
Answers one of the top three questions everyday, low- and middle-class workers, ages 50’s and 60’s workers had who participated in the pre-retirement seminars I conducted for my Fortune 100 employer back in the 1980’s and 1990’s.
Best to you. Jack
We seem to be using hybrid strategy combining a floor method with an eye toward RMDs. Current income from SS and a couple puny pensions leaves us floating 8% above both fixed and discretionary spending. My RMD begins this year, Chris’s in 2028. We have been taking about 3% from IRAs for the past several years and are currently reinvesting to both high yield savings and taxable brokerage accounts. At some point we will need to replace the 2010 Prius. That spending will put us very close to the floor, which might necessitate using some of the IRA money for living expense, but not so much that we need to buy an immediate annuity. Later, after the first of us croaks and the smaller SS benefit disappears, more of the IRA distribution may be needed. Overall I feel great about our finances going forward. Now we just have to wait for the bad health hammer to strike a blow to our well laid plans.
Good article. #5 here. None of our withdrawal decisions are based on the markets which removes a lot of angst/concern/monitoring for us and gives us the “license to spend” not to mention peace of mind. We use an LMP-liability matching portfolio. The liability is the projected gap between guaranteed income (SS, pensions, annuities) and all expenses, not just fixed. And that gap is covered by a rolling TIPs ladder with one TIPs maturing annually covering that year’s gap. More than half of assets are in stocks for long term growth and stocks are frequently the source of funding the TIPs when doing well like the last couple of years.
We’re enacting a similar plan to yours, Rob, as outlined in this article I wrote a few months ago. https://humbledollar.com/2024/09/laying-down-a-floor/
Another withdrawl mechanism is the Guardrails Method designed by Jonathan Guyton and Willian Klingler.
Amy Arnott from Morningstar explains this method in this article:
https://search.app/t9z68GgVJ8JxgG6D7
Thanks Jonathan. We are using a combination of #5 and # 4. We set a floor with pension and my wife’s SS. I’ll be turning on SS in the next few years. We also have a few years of “above the floor” expenses in cash and short-term instruments. Dividends and interest are reinvested currently. This will be our second year of renting our vacation home, so that income will offset the home’s expenses. We evaluate on a regular basis and will tweak it as we think necessary.
We use a combination of withdrawing an amount that doesn’t exceed our average earned dividends and interest and a “fake RMD”. I have tracked this dividend and interest number monthly for two years before I retired in 2021. We then “tweaked” the IRS RMD chart to start at 65 and withdraw that calculated amount (not to exceed our earned dividends and interest). So far we have not had to sell one share of our equities so our dividend motor keeps humming along and we sleep very well at night.
My wife and I were recently looking at income and spending after my expected shift to part-time work. The income will cover everything we currently spend, but I mentioned that we had no reason to refrain from pulling a small amount from our retirement accounts if we wanted. She replied that I’d never spend that money until I had to. She’s right. Because of that, I see withdrawal strategies as a way to overcome my reluctance to spend by encouraging me to spend more, rather than less.
Hi Ed,
You wrote, “but I mentioned that we had no reason to refrain from pulling a small amount from our retirement accounts if we wanted. She replied that I’d never spend that money until I had to.”
One of the topics I read in investing articles is that many disciplined savers (which most HD readers most likely are) have trouble spending from their retirement accounts and thus deprive themselves of the enjoyment their years of savings could provide.
If you look at the IRS uniform lifetime tables they are designed not to run out until one is older than 120 years old, which I think we all can agree we will not reach.
If you look at the current table the designed withdrawl amounts on the chart start at age 73 with a factor of 26.5. For the first 10 years the factor changes by 0.8 to 1.0 per year. Since the dollar amount withdrawn is based on your year end balance the amount fluctuates year to year decreasing when your balance is lower.
You might consider starting withdrawing earlier than 73 and add a factor of 1 for each year. As a result someone who is 65 would use a factor of 34.5, which would result in a withdrawal of just under 29K.
Just something to consider.
That’s just under 29K from a million dollar balance.
David, that’s an interesting way to look at it, and reasonable. As Jonathan writes above, the strategies provide a psychological help to overcome whatever fears surround the spend-down phase of retirement planning. I’ll need a little assist to shift into spending. To rephrase the common description of travel in retirement, some of us need help moving from “no spend” to “slow spend” into “go spend.”
David, I totally resemble your remark.
we are lucky enough to have a stable life style….all of our monthly expenses are covered by our Social Security payments our fun monies are my VA benefits and my wife’s part-time work…our investments are our Emergency Funds which we do not touch unless needed……we have a Roth so no RMD…..we live well within our means but well enough to enjoy life when we want with no worries about monies….our we lucky or well prepared I think both
Good Luck Jonathan we are both on a Cancer Journey and hope it is long
https://www.bogleheads.org/wiki/Variable_percentage_withdrawal
We use a variable percentage withdrawal rate that is based on Monte Carlo risk-based guard rails.
Every six months or so we run a Monte Carlo analysis and look for a withdrawal amount that results in a 70% rate of success.
We have a five-year bond ladder in place which provides an income floor for us to use to cover fixed expenses and a small amount of discretionary spending.
When the market is performing well, we effectively roll maturing rungs into our checking account and withdraw from our portfolio up to the guard rail limit the amount indicated and use it to replenish rungs on the bond ladder.
How did you decide on a 70% rate of success? I like it, but seldom see people aiming this low. Most people want 90% or higher success rate, which I understand psychology, but as I stated above seems to leave one not spending enough during one’s retirement and risking leaving memories and helping others behind.