My husband wants to retire in August 2025 when I turn 65. My husband turned 65 in December 2024. We have $1.1 million saved (includes stocks, ETFs and mutual funds) along with $1.6 million in a 401(k). We will, at that time, start to collect Social Security. What would be a good rule of thumb for how much we could withdraw from our savings/401(k) without touching the principal?

– Shari

At its core, retirement planning is about making informed decisions to ensure your hard-earned savings support your desired lifestyle over the duration of your retirement. The concern you raise is a common one for soon-to-be retirees: How much can I withdraw annually from my savings, brokerage and retirement accounts without depleting the principal? It appears you’re taking all the right inputs into account, including your assets, expenses and other sources of retirement income such as Social Security. Exploring each of these factors and evaluating some related questions should help you back into a reasonable withdrawal rate for your retirement.

A financial advisor can help you manage your streams of retirement income and structure your account withdrawals in a way that accounts for your needs. Match with a fiduciary advisor today.

Assessing Your True Income Needs

Determining an appropriate withdrawal strategy begins with understanding your true income needs. To identify this, start by evaluating the following:

What are your annual expenses, and how do you anticipate them changing? Review your spending habits and anticipate how they may change in retirement. For example, commuting costs may decrease, but healthcare and travel expenses might rise.
Do you have philanthropic and/or legacy planning aspirations? If you intend to donate to charities or support family members, include these goals in your budget.
What is your family medical history, and how is your health? A realistic estimate of healthcare expenses, including premiums, co-pays and potential long-term care costs, is crucial. Budgeting for additional insurance coverage may be wise depending on your current health and future medical expectations.
Do you plan on traveling? If travel is a priority, factor in the associated costs for flights, accommodations, activities and leisure items during your trips.

Answering these questions will help you determine how much of your total asset base you’ll need to rely on annually. In turn, this exercise will help you identify whether living off the interest and dividends generated by your portfolio is feasible, or if you’ll need to tap into your principal. If preserving your principal is a priority, then you may need to make adjustments to your lifestyle or spending habits to align with a sustainable withdrawal rate.

(And if you need additional help with this process, consider working with a financial advisor who specializes in retirement planning.)

Understanding Withdrawal Rates

One of the most widely recognized rules of thumb for withdrawals in retirement is the 4% rule. This guideline originated from a 1994 study by financial planner William Bengen, who suggested that retirees could take out 4% of a portfolio in the first year of retirement, then adjust that amount annually for inflation, without running out of money over a 30-year period.

While the theory provides the kind of rule of thumb that many future retirees seek when trying to answer a complex question, there are several factors and potential drawbacks to consider when applying this approach to your unique situation. First, the 4% rule is based on historical market performance and assumes a balanced portfolio of stocks and bonds (i.e., 50% stocks and 50% bonds). It doesn’t account for today’s market and interest rate environments (including historic concentration among a few leading companies in the U.S. stock market), potential volatility in markets and interest rates, advancements in financial instruments available to investors, differing asset allocations or personal circumstances.

Second, it does not account for changing inflation and tax regimes. Your target withdrawal rate should account for inflation eroding purchasing power and taxes on withdrawals from tax-deferred accounts like 401(k)s, both of which could change over the course of your retirement (inflation more fluidly so than tax rates). Lastly, it does not account for fees. If you work with a financial advisor, you’ll need to incorporate advisory fees into your calculations.

(Retirement planning can be complex, but working with a financial advisor may help you build a customized plan based on your assets and income needs.)

Calculating Your Withdrawal Rate

Determining an appropriate withdrawal strategy begins with understanding your true income needs. A sustainable withdrawal rate depends on your unique financial situation, including anticipated Social Security benefits, expense expectations, and time horizon. Here’s how to approach it step by step:

Estimate your retirement income from Social Security: Social Security will likely provide a baseline of income for you and your husband. You can use the Social Security Administration’s tools to estimate your monthly benefits based on your earnings history and planned retirement age.
Determine your expense expectations: Create a detailed budget that reflects your lifestyle, goals and anticipated healthcare costs. For example, if your annual expenses are $120,000, and Social Security provides $50,000, you’ll need $70,000 annually from your portfolio.
Calculate the required withdrawal rate: Divide the amount needed from your portfolio by your total savings. For instance, $70,000 divided by your $2.7 million asset base (savings + 401(k)) equals a 2.6% withdrawal rate.
Compare your withdrawal rate to historical market returns: A withdrawal rate of 2.6% is well below the 4% rule and aligns with historical real (after inflation) market returns for a diversified portfolio. This suggests you can potentially preserve your principal while covering your income needs.

However, if your desired lifestyle requires a withdrawal rate closer to 5% or 6%, you’ll need to evaluate its sustainability. Higher withdrawal rates have historically been challenging to maintain over long periods after accounting for inflation, taxes and fees. To support a higher withdrawal rate, you might need to adjust your asset allocation to prioritize generating sufficient growth to outpace withdrawals. This decision, of course, should be informed by your risk profile, which includes both your ability and your willingness to bear risk.

If moving to a more growth-oriented asset allocation is not an option, then you may need to adjust the expense side of the ledger. Consider scaling back on non-essential expenses to reduce your income needs. Throughout this process, be sure to reassess your long-term goals. If preserving principal becomes less critical, then you might be able to adopt a higher withdrawal rate with the understanding that your asset base may decline over time.

(And if you need help calculating your own withdrawal rate for retirement, find a financial advisor who serves your area.)

Other Strategies to Protect Your Assets and Support Withdrawals

While rules of thumb and target withdrawal rates can be helpful for retirement planning, it’s important to remain flexible to the extent possible since many things can change during retirement.

Volatility and prolonged market downturns can disrupt investment plans, but setting aside one to two years’ worth of expenses in cash provides a buffer. This approach allows you to cover living costs without selling investments at a loss during market declines.

To maintain flexibility, consider a dynamic withdrawal strategy that adjusts based on portfolio performance. For example, you would reduce withdrawals during challenging years for the markets and increase withdrawals when the markets are stronger. (And if you’re interested in a more dynamic approach to retirement income planning, consider working with a financial advisor.)

Bottom Line

Retirement is about striking a balance between enjoying your hard-earned savings and ensuring financial security for the long term. By carefully assessing your income needs, selecting a withdrawal rate aligned with expected portfolio returns and incorporating other income sources such as Social Security benefits, you can create a plan that meets your goals while protecting your principal.

Ultimately, financial planning is a dynamic process. Regularly review your withdrawal strategy to adapt to market conditions, personal circumstances and evolving financial goals. With thoughtful planning and prudent decision-making, you can look forward to a comfortable and fulfilling retirement.

Retirement Income Planning Tips

Sequence risk – retiring right before or during a market downturn – can deplete portfolios early. A three-bucket approach can mitigate this by holding cash reserves (one to two years of expenses), intermediate fixed-income investments (bonds or CDs), and long-term growth assets (stocks and real estate). This structure allows retirees to draw from safer assets when markets are down, giving equities time to recover.
A financial advisor can help you navigate the complexities of retirement income planning. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
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Jeremy Suschak, CFP®, is a SmartAsset financial planning columnist who answers reader questions on personal finance topics. Got a question you’d like answered? Email AskAnAdvisor@smartasset.com and your question may be answered in a future column.

Jeremy is a financial advisor and head of business development at DBR & CO. He has been compensated for this article. Additional resources from the author can be found at dbroot.com.

Please note that Jeremy is not a participant in SmartAdvisor AMP, is not an employee of SmartAsset and he has been compensated for this article.

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