SmartAsset: What is Retirement Safe’s Withdrawal Rate?

Saving for retirement is an important goal. But the same goes for not running out of retirement savings. To avoid this, personal finance and retirement experts have established a “safe withdrawal rate for retirement”. This is a formula that allows retirees to make annual withdrawals without running out of money. Many experts suggest taking about 4% of your retirement savings each year, while others recommend 3% or even 2%. Let’s see how retirement safe withdrawal rates are set.

A financial advisor can help you create a financial plan for your retirement needs and goals.

What is Retirement Safe’s withdrawal rate based on?

The 4% rule was created in 1994 by financial advisor William P. Bengen. Simply put, this rule directs retirees to withdraw 4% of their savings in the first year of retirement, then adjust for inflation each year thereafter. At this rate, retirees are expected to hold on to their savings for at least three decades.

So if you retire at age 67 with $750,000 in retirement savings, you can withdraw $30,000 (4%) of those savings in your first year of retirement. All other withdrawals made each year thereafter would depend on inflation. And ideally, you would be able to make your savings last until you are 97 years old.

In 2021, Bengen said the ideal withdrawal rate for safe retirement is higher at 4.7%. But while this rule has become commonplace for retirement planning, experts point out that it also has potential pitfalls, failing to account for longevity and varying savings rates.

Therefore, determining your safe withdrawal rate should be based specifically on your financial situation. And it can force you to actively rebalance and diversify your retirement investments instead of setting them and forgetting them.

How to Determine Your Safe Withdrawal Rate

SmartAsset: What is Retirement Safe's Withdrawal Rate?

SmartAsset: What is Retirement Safe’s Withdrawal Rate?

Living on 4% of your retirement savings doesn’t guarantee you won’t run out of money in retirement. Here are three factors to keep in mind when determining your safe withdrawal rate:

  • You still need to save enough to pay for your retirement. Withdrawing 4% from your retirement savings is only safe if you have enough money to cover your retirement expenses. For example, if you’ve only saved $100,000 for retirement, withdrawing 4% each year ($4,000) wouldn’t go very far. Instead, the 4% rule can be used as a benchmark for setting savings goals. Saving $1 million for retirement, as another example, would allow you to withdraw $40,000 each year. But that goal may be out of reach, depending on financial circumstances, and may not even be up to par, depending on retirement needs. But combined with Social Security benefits and other retirement investments, the math might work.

  • Where your money is invested is important. Make sure you know how much your retirement money is earning you. For example, if you have everything in a savings account earning 2% interest, spending 4% each year would eat into your account significantly. For the retirement safe withdrawal rate rule to work, you will need to diversify your retirement portfolio. Experts recommend having a portfolio invested in stocks and bonds. That said, you need to consider the risks and rewards of asset allocation.

  • Your retirement age and longevity will also impact your withdrawal rate. The safe withdrawal rate formula is also based on a 30-year retirement. If you plan to retire early, you may need to adjust the percentage of income you withdraw from your retirement fund. And, if you live longer than the 30-year period, you also need to plan for longevity.


SmartAsset: What is Retirement Safe's Withdrawal Rate?

SmartAsset: What is Retirement Safe’s Withdrawal Rate?

Saving for retirement takes a lot of planning. Establishing a safe withdrawal rate for retirement will depend on how much you have saved, how long you will live and how much you will need. While the 4% rule may work for some retirees, you may need to take a more practical approach and actively rebalance and diversify your retirement portfolio to achieve a sustainable withdrawal rate.

Retirement Planning Tips

  • A financial advisor can help you rebalance and diversify your retirement portfolio to meet your goals. SmartAsset’s free tool connects you with up to three financial advisors who serve your area, and you can interview your matching advisors for free to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, start now.

  • SmartAsset’s Asset Allocation Calculator can help you balance and rebalance your portfolio to meet your retirement goals.

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