Retirement Income Strategy
Don’t start with a percentage. Start with what you need.
What This Means
How much can you safely withdraw from your investment portfolio in retirement?
There isn’t one withdrawal rate that’s right for everyone.
You’ve probably heard of the 4% rule—the idea that retirees can withdraw approximately 4% of their portfolio in the first year of retirement and then adjust that amount for inflation over time.
I think it’s a useful starting point. But I don’t believe a rule of thumb should determine how much you can spend in retirement.
Your retirement income plan should be built around your situation.
How old are you? Are you married or single? How much do you actually need to spend every month? What will you receive from Social Security, pensions, rental income, or other sources? How much of your money is taxable, pre-tax, or Roth? Do you want to leave money behind?
All of those things matter.
That’s why I prefer to determine how much income you actually need from your portfolio and then stress-test the plan against different market environments.
For one person, a 2% withdrawal rate may provide everything they need. Someone else may need 4%. Another person may be able to withdraw 6%.
And those differences are meaningful. On a $2 million portfolio, a 4% withdrawal is $80,000 per year. A 6% withdrawal is $120,000—a 50% increase in annual income.
Neither percentage is automatically right or wrong.
The question is whether your portfolio can support the income you need for the life you want.
Common Questions
Is a 6% retirement withdrawal rate too high?
Not necessarily. A 6% withdrawal rate may work for some people and be completely inappropriate for others. Your age, other income sources, portfolio, spending needs, taxes, and long-term goals all matter. That’s why I believe withdrawal rates should be tested as part of an overall retirement income plan.
Should my withdrawal rate stay the same every year?
A common approach is to start with a dollar amount that your retirement plan can support and then adjust that amount over time for inflation. Because your portfolio value will fluctuate, the percentage you’re withdrawing will naturally move up and down from year to year. The important thing is making sure your income remains sustainable as your spending needs and market conditions change.
What happens if the market falls while I’m taking withdrawals?
Remember This:
Your income plan should be built around your life.