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What Is the Retirement Safe Withdrawal Rate?


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

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

What Is the Retirement Safe Withdrawal Rate Based on?

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

So, if you retire at age 67 with $750,000 saved in retirement, you can withdraw $30,000 (4%) of that savings in your first retirement year. All other withdrawals each year after would depend on inflation. And ideally, you’d be able to make your savings last until you turn 97.

In 2021, Bengen said that the ideal retirement safe withdrawal rate 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 diverse savings rates.

Therefore, determining your safe withdrawal rate needs to be based specifically on your financial circumstances. And this may require you to actively rebalance and diversifying your retirement investments instead of setting them and forgetting them.

How to Determine Your Safe Withdrawal Rate

SmartAsset: What Is the Retirement Safe Withdrawal Rate?

Living off 4% of your retirement savings doesn’t guarantee that 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 retirement. Withdrawing 4% of your retirement savings is only safe if you have enough to cover your retirement expenses. For example, if you saved only $100,000 for retirement, making a 4% withdrawal each year ($4,000) wouldn’t go very far. Instead, the 4% rule can be used as a mark to set savings goals. Saving $1 million for retirement, as another example, would allow you to withdraw $40,000 each year. But this goal may be out of reach, based on financial circumstances, and can even fall short, depending on retirement needs. But combined with Social Security benefits and other retirement investments, the math might work out.
  • Where your money is invested matters. Make sure you know how much your retirement money is earning for you. For instance, if you have all of it in a savings account generating 2% interest, spending 4% each year would eat significantly into your account. For the retirement safe withdrawal rate rule to work, you will beed to diversify your retirement portfolio. Experts recommend having a portfolio invested in stocks and bonds. That said, you should consider the risks and benefits involved when allocating assets.
  • Your retirement age and longevity will also impact your withdrawal rate. The retirement safe withdrawal rate formula is also based on a 30-year retirement. If you plan on retiring early, you may have to adjust the percentage of income that you take out of your retirement funds. And, if you live longer than the 30-year time frame, you should also plan for longevity.

Bottom Line

SmartAsset: What Is the Retirement Safe Withdrawal Rate?

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

Retirement Planning Tips

  • A financial advisor can help you rebalance and diversify your retirement portfolio to reach your goals. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
  • SmartAsset’s asset allocation calculator can help you balance and rebalance your portfolio to reach your retirement goals.

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