One of the most important decisions in retirement is choosing how much to withdraw from your savings. You need to take out enough to meet your spending needs, but not so much that you end up running out of money.
While there’s no real consensus on a safe withdrawal rate, a recent report from Edward Jones has three tips for determining what your ideal withdrawal rate should be in retirement. The financial services firm recommends sticking to a sustainable rate, adjusting it as needed during market volatility and aligning your spending with you personal goals. This method emphasizes the importance of individualized planning and includes specific withdrawal rate recommendations based on your age and risk tolerance.
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What to Know About Retirement Withdrawal Rates
A popular approach to deciding how much to withdraw from a retirement account employs the 4% rule. This guideline, which was developed in the 1990s, suggests withdrawing 4% from your savings in your first retirement year and then adjusting subsequent withdrawals for inflation. Doing so from a balanced portfolio all but ensures your money lasts 30 years.
The 4% rule’s creator, financial advisor William P. Bengen, later revised it to 4.7%. Since then, some experts have warned the rule may oversimplify matters and have offered alternative strategies.
JPMorgan Chase, for instance, has advised drawing down no more than 2% to 3% of savings each year, citing ongoing inflation, increased life expectancy and prospects for sharply lower returns. JPMorgan suggested considering a number of factors to create a personalized withdrawal strategy, including tax rates, financial commitments, health care expenses and portfolio composition.
Morningstar research from 2021 found that a 3.3% initial withdrawal rate was appropriate due to low bond yields and potentially overvalued equity markets. The company has since updated its guidance to 3.8%. Morningstar also evaluated more flexible alternative strategies that include forgoing inflation adjustments, sticking with required minimum distributions (RMDs), creating guardrails for withdrawals and reducing the withdrawal rate by 10% after losses.
Tips for Withdrawals From Edward Jones
Edward Jones suggests the key is not to pick a single standard rate and stick with it, but to choose one that fits your needs and alter it as your situation and the economic climate shift. The firm offers these three tips to help you find a withdrawal rate:
1. First, align your withdrawal rate with your age and risk tolerance: Edward Jones provides initial withdrawal guidance based on age and risk tolerance. These initial withdrawal rates range from as low as 3.0% for a conservative investor in their early 60s to as much as 8.0% for a less conservative 80-year-old.
Early 60s
- More conservative: 3%
- Less conservative: 3.5%
Late 60s
- More conservative: 3.5%
- Less conservative: 4%
Early 70s
- More conservative: 4%
- Less conservative: 5%
Late 70s
- More conservative: 5%
- Less conservative: 7%
80s and beyond
- More conservative: 6%
- Less conservative: 8%
2. Tweak your withdrawal rate when needed: Edward Jones recommends you maintain a flexible withdrawal rate, especially during volatility. For instance, you may need to lower your withdrawal rate or skip annual inflation-adjustment raises during economic downturns.
3. Spend according to your goals and values: Reflect on your retirement vision and ensure that your current spending aligns with the goals and values you set for yourself. For example, if you hope to travel extensively in retirement, aim to budget for that while spending beyond your means. Alternatively, you may emphasize contributing to charity. Focus on supporting your main goals and values.
Additional Considerations
Edward Jones elaborates with additional factors to consider when determining your safe withdrawal rate.
- Legacy: If you prioritize leaving assets to beneficiaries in your will, you may want to reduce your withdrawal rate so you’ll have more left to bequeath.
- Investment strategy: Where your money is invested matters. Different weightings among asset classes may produce higher or lower returns, along with varying risk profiles.
- Retirement age and longevity: The safe withdrawal rate formula is based on a 30-year retirement. If you plan on retiring early or living longer than the 30-year timeframe, adjust your withdrawal rate accordingly.
Bottom Line
Determining the right withdrawal rate is a complex process that requires careful consideration of individual needs, market conditions, investment strategies and long-term goals. In calculating a safe withdrawal rate that meets your needs, Edward Jones suggests that it should be appropriate for your age and risk tolerance, market conditions and your goals in retirement.
Retirement Planning Tips
- Consulting a financial advisor and staying flexible in your approach can help ensure a sustainable and enjoyable retirement. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three 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.
- Figuring out how much you need to save in order to support your spending needs is a critical component of retirement planning. SmartAsset’s retirement calculator can tell you how much you need to save now to pay for a comfortable retirement down the road.
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