How Much Can You Safely Withdraw From Your Retirement Accounts Each Year?

By Michael Ruger, CFP®
Partner and Chief Investment Officer at Greenbush Financial Group

Once you retire, one of the biggest financial questions changes.  During your working years, you were probably asking, “How much should I save for retirement?”

Once you reach retirement, the question becomes, “How much can I safely withdraw from my retirement accounts each year without running out of money?”

In the financial planning community, you will hear several rules of thumb for retirement withdrawal rates. The 4% rule is probably the best known. You may also hear 5% discussed as a reasonable retirement withdrawal rate in certain situations, while some retirees may consider withdrawal rates of 6% or even higher.

But just like there isn't one magic amount of money everyone needs to retire, there isn't one safe withdrawal rate that works for every retiree.

A sustainable retirement withdrawal rate depends on several factors, including:

• How long you expect your retirement to last

• How your retirement accounts are invested

• How dependent you are on your portfolio for income

• Your Social Security, pension, and other income sources

• Inflation

• Taxes

• Market performance, particularly during the first several years of retirement

• How much money you ultimately want to leave to your children, family, or charities

• Whether you are willing to adjust your spending when market conditions change

Understanding these variables can help you determine whether withdrawing 4%, 5%, 6%, or another amount from your retirement accounts may be reasonable for your financial plan.

What Is a Retirement Withdrawal Rate?

Let's start with the basics. Your retirement withdrawal rate is simply the percentage of your investment portfolio that you withdraw over a given period, usually expressed as an annual percentage.

Assume you enter retirement with $1 million invested.

A 4% initial withdrawal would equal:

$1,000,000 × 4% = $40,000

A 5% withdrawal would equal:

$1,000,000 × 5% = $50,000

And a 6% withdrawal would equal:

$1,000,000 × 6% = $60,000

At first glance, the difference between withdrawing 4% and 6% may not seem enormous. It is only two percentage points.

But on a $1 million portfolio, that represents an additional $20,000 withdrawn during the first year alone. Over a retirement that could potentially last 25 or 30 years, the difference in withdrawal rates can have a significant impact on how long your retirement assets last.  This is why determining a sustainable retirement withdrawal rate is such an important part of retirement planning.

Is the 4% Rule Still a Good Retirement Strategy?

The 4% rule is probably the most recognized retirement withdrawal guideline.  In its traditional form, the concept generally involves withdrawing approximately 4% of the initial portfolio during the first year of retirement and then adjusting that dollar amount for inflation in subsequent years.

For example, if you retire with $1 million, your first-year withdrawal would be $40,000. If inflation were 3% during the following year, the withdrawal would increase to approximately $41,200 rather than simply remaining at $40,000.

The attraction of the 4% rule is its simplicity.  However, it is important to understand that the 4% rule is a guideline, not a guarantee.  Your retirement may be longer or shorter than the period contemplated by a particular withdrawal study. Your portfolio may be invested differently. Your investment returns may be better or worse. Your expenses may change throughout retirement. Taxes and investment costs also matter.

For those reasons, we generally believe it is more useful to view a 4% withdrawal rate as a retirement planning reference point rather than a universal answer.

What About a 5% Retirement Withdrawal Rate?

A 5% withdrawal rate is also commonly discussed.  If you have $1 million in retirement accounts, a 5% withdrawal equals $50,000 during the first year.

The intuitive argument sometimes used to support this withdrawal rate goes something like this: If your investment portfolio earns 5% and you withdraw 5%, you are essentially spending the earnings while preserving the original principal.  Unfortunately, retirement investing isn't quite that simple.  Investment returns do not arrive in a straight line.

Your portfolio might gain 12% one year, lose 15% the next year, gain 8% the year after that, and experience a variety of returns throughout retirement. At the same time, the amount you need to withdraw may increase because of inflation.  There are also taxes, investment expenses, changes in spending, and potentially decades of withdrawals to consider.  Therefore, an expected 5% long-term investment return does not automatically mean that a 5% inflation-adjusted withdrawal rate can be sustained indefinitely.

That distinction becomes particularly important once you understand sequence-of-returns risk.

Your Investment Allocation Matters

One of the most important factors in determining how much you can withdraw from your retirement accounts is how those accounts are invested.   During your accumulation years, you may have been comfortable maintaining a relatively aggressive portfolio because you were still adding money to your retirement accounts and had many years before you needed those assets.

Retirement changes that equation.  Instead of contributing money to your 401(k) every paycheck, you may now be taking money out of your investment portfolio every month.  This generally makes investment risk more complicated.  If your retirement portfolio declines significantly while you are simultaneously taking distributions, you may be forced to sell investments while their values are down. Those dollars are no longer in the account when the market eventually recovers.

This is one reason many retirees reassess their investment allocation as they approach retirement.  However, becoming too conservative can create a different problem.

Being Too Conservative in Retirement Can Also Create Risk

Retirement does not necessarily mean all of your money should immediately move into CDs, money market accounts, or other short-term investments.  Imagine you retire at age 60 and your financial plan assumes you may live until age 90. That's a 30-year investment time horizon.

You may need some of the money in your retirement accounts next month. But other dollars might not be needed for 10, 15, or even 20 years.  Those different time horizons matter.

Assets needed for near-term expenses may warrant a more conservative approach. Assets intended to fund expenses decades into the future may have more time to withstand short-term market fluctuations and potentially benefit from long-term growth.  Maintaining some exposure to growth investments may also help a retirement portfolio keep pace with inflation.

The objective is generally not to take as little investment risk as possible. Instead, the goal is to maintain an investment allocation appropriate for your income needs, risk tolerance, time horizon, and overall financial plan.

Why Sequence of Returns Matters in Retirement

One of the most important concepts for retirees to understand is sequence-of-returns risk.

During your accumulation years, you are generally adding money to your investment accounts rather than withdrawing it. Market declines can certainly be uncomfortable, but if you remain invested and continue contributing, you have time to participate in a potential recovery.  Once you retire and begin taking distributions, the order in which investment returns occur becomes much more important.

Consider two hypothetical retirees.

Both retire with $1 million.

Both ultimately experience the same average investment return over a period of time.

However, Retiree A experiences several strong investment years immediately after retirement, followed by weaker years later.

Retiree B experiences a major market decline immediately after retirement and stronger returns later.

If neither retiree were taking withdrawals, their ending results could be much more similar.  But they are taking withdrawals.

Retiree B is forced to withdraw money after the portfolio has declined. Those shares are sold and cannot participate in the eventual market recovery.  That can leave Retiree B with substantially fewer assets later in retirement even though the long-term sequence contains similar returns.  This is why the first several years of retirement can be particularly important.

A Simple Example of Sequence-of-Returns Risk

Assume you retire with $1 million and need $50,000 from your portfolio during your first year of retirement.

Now assume the market declines and your portfolio falls 20%.

Ignoring other variables for simplicity, your $1 million could decline to approximately $800,000 before considering withdrawals.

If you then need to take $50,000 out to pay your expenses, you are withdrawing money from an already-depressed portfolio.  Now compare that with someone whose portfolio increases 20% during the first year of retirement.  The second retiree has a significantly larger asset base from which to take the same $50,000 withdrawal.

The market may eventually recover for both investors, but the first retiree has fewer dollars participating in that recovery because some investments had to be sold to fund living expenses.  This is why we pay close attention to investment risk and withdrawal strategies when clients transition from accumulating assets to distributing them.

Does That Mean Retirees Should Always Invest Conservatively?

Not necessarily.  This is where retirement planning becomes very individualized.  Some retirees are highly dependent on their investment portfolio for income. Perhaps they have no pension and Social Security only covers a relatively small portion of their annual expenses.

If the portfolio has to produce $60,000 or $70,000 every year to support the household, managing downside risk may be particularly important.  Now consider another retiree who receives a significant pension, Social Security, rental income, and perhaps some part-time income. Those recurring income sources might cover most or even all of the household's basic expenses.  That retiree may need very little from the investment portfolio each year.

Because the portfolio isn't responsible for producing as much immediate income, the retiree may have greater flexibility regarding how the assets are invested.  The important distinction is that this doesn't automatically mean the second retiree should take more risk.  It means the appropriate investment strategy should be determined within the context of the entire financial plan rather than simply using age to determine how aggressively or conservatively someone should invest.

Could a 6% Withdrawal Rate Ever Work?

This brings us to another common question: Can you safely withdraw 6% from your retirement accounts?  Potentially—but a 6% withdrawal rate creates different risks than a 4% withdrawal rate, particularly if the withdrawals need to increase with inflation and continue for several decades.

Consider a retiree with a $1 million investment portfolio.

At 4%, the initial annual withdrawal is $40,000.

At 5%, it is $50,000.

At 6%, it is $60,000.

Whether that $60,000 withdrawal is sustainable depends on many factors.  If the retiree is 80 years old, has substantial guaranteed income, and has relatively flexible spending, a 6% withdrawal might have a very different impact than it would for a 60-year-old who expects the portfolio to provide $60,000 of inflation-adjusted income for the next 35 years.

A higher-risk investment portfolio also should not be viewed as an automatic solution for supporting a higher withdrawal rate.   Yes, accepting more investment risk can increase potential returns. But it also increases the potential for significant losses—and those losses can be particularly damaging when they occur early in retirement while withdrawals are being taken.

Taking more investment risk solely because you want to withdraw more money can be a dangerous retirement strategy.

Your Age at Retirement Matters

The age when you retire is another major factor in determining an appropriate withdrawal rate.  Someone retiring at 60 may need their investment portfolio to last 30 or 35 years.  Someone retiring at 70 may have a shorter anticipated distribution period.

All else being equal, the longer the portfolio needs to provide income, the more cautious you generally need to be about assuming that a high withdrawal rate can continue indefinitely.  This is why applying the exact same withdrawal rule to every retiree can be misleading.

A 60-year-old and an 80-year-old may have completely different planning horizons even if both have exactly $1 million invested.

Inflation Changes Your Withdrawal Needs

Inflation also needs to be considered.  Suppose you retire and withdraw $50,000 during your first year.  If inflation averages 3%, maintaining the same purchasing power would require increasingly larger dollar withdrawals over time.  After 10 years, approximately $67,200 would be required to have purchasing power similar to $50,000 today.

After 20 years, the amount would be approximately $90,300.

After 30 years, it would be approximately $121,400.

This is another reason why saying, “My portfolio earns 5%, so I can withdraw 5% forever,” oversimplifies the situation.  Your lifestyle doesn't remain frozen at today's prices.  A long-term retirement plan needs to account for the possibility that your withdrawals will increase over time as the cost of goods and services rises.

Taxes Matter When Calculating Your Retirement Withdrawal Rate

There is another important distinction between what you withdraw and what you actually have available to spend.  If you withdraw $50,000 from a traditional IRA or 401(k), you generally do not have the entire $50,000 available for living expenses because the distribution will typically be subject to income tax.  For example, assume you need $50,000 after taxes from your retirement account.  Depending on your tax situation, you may need to withdraw $55,000, $60,000, or another amount to produce the $50,000 of spendable cash.  That larger gross withdrawal increases the actual withdrawal rate from the portfolio.

Roth IRAs and taxable brokerage accounts have different tax characteristics, which is why the accounts you use to fund retirement can be just as important as the total amount you withdraw.

When calculating your retirement withdrawal rate, make sure you understand whether you are discussing gross distributions or after-tax spending.

Your Withdrawal Rate Doesn't Have to Stay the Same Every Year

Another misconception is that once you choose a retirement withdrawal rate, you are locked into it forever.  Real retirement spending doesn't usually work that way.  You may spend significantly more during your first 10 years of retirement because you are healthy and traveling frequently.  Later in retirement, your travel expenses may decline.

Healthcare or long-term-care expenses could eventually increase.  You may buy a new vehicle one year and not replace it again for eight years. You might purchase a second home, help a child financially, or pay for a major home renovation. Retirement expenses move around.  Your withdrawal strategy can potentially move with them.

This is why we generally prefer detailed year-by-year retirement projections over simply assuming a retiree will withdraw exactly 4% or 5% every year for the rest of their life.

You Don't Necessarily Have to Preserve Your Entire Principal

There is another important philosophical question that often gets lost in conversations about safe withdrawal rates.  What is the money for?

Suppose you retire with $1 million.  A retirement strategy that allows you to maintain the entire $1 million throughout retirement might sound ideal.  But what if your primary objective isn't to leave $1 million to your children?   Perhaps you saved the money so you could use it.  You might want to travel more during your 60s and early 70s. Maybe you want to buy a vacation home. Perhaps you want to help your children or grandchildren while you're alive and can enjoy seeing the impact of the gift.

If your financial plan indicates that you can safely spend more than a traditional withdrawal guideline while still maintaining sufficient assets for later life, intentionally drawing down some principal isn't necessarily a financial planning failure.  It may actually be the plan. The objective isn't always to die with the largest possible investment portfolio.  The objective is to use your financial resources in a way that supports your retirement goals while maintaining a reasonable margin of safety for longevity and unexpected expenses.

Your Legacy Goals Matter

This is also where estate planning goals become part of the withdrawal-rate conversation.

Two retirees could have identical investment portfolios and identical expenses but choose different withdrawal strategies.  One retiree may want to leave the majority of the portfolio to children and grandchildren. 

The other may tell us, “I want to enjoy what I've saved. As long as I have enough money to comfortably support myself for the rest of my life, I'm comfortable spending down my investments.”

Neither objective is inherently right or wrong.  But the appropriate withdrawal strategy may be very different.

If leaving a large inheritance is important, preserving principal may be a significant goal. If maximizing retirement experiences is more important, intentionally spending some principal may be reasonable as long as the financial plan supports it.

The Retirement Withdrawal Rate Should Be Monitored

Perhaps one of the biggest mistakes is calculating a withdrawal rate on the day you retire and never looking at it again.  Retirement can last decades.  During that time, investment markets change. Tax laws change. Your expenses change. Your health changes. Your income sources change. Your goals change.  Your retirement withdrawal strategy should evolve as well.

Suppose you retire with $1 million and initially withdraw $50,000 per year.

Five years later, perhaps your portfolio has grown substantially despite the withdrawals. Your financial plan may indicate that you have room to increase spending.  Alternatively, perhaps the market experienced several difficult years immediately after retirement and your portfolio is below its original projections.  That may be a signal to temporarily reduce discretionary spending, postpone a large purchase, or reconsider the investment and withdrawal strategy.  Small adjustments made early can sometimes prevent much larger adjustments later.

So, What Is a Safe Withdrawal Rate in Retirement?

There isn't one percentage that is safe for everyone.

The 4% rule can provide a useful starting point for understanding retirement withdrawals. A 5% withdrawal rate may work in some financial plans. In other circumstances, a retiree may be able to withdraw more, while another retiree may need to withdraw less.

Instead of asking only, “What percentage can I safely withdraw?”, consider asking:

“How much can I withdraw each year while maintaining a reasonable probability that my assets will support my lifestyle for the rest of my life?”

Answering that question requires looking at your age, expected longevity, annual expenses, Social Security, pensions, investment allocation, taxes, inflation, market conditions, legacy goals, and willingness to adjust spending.  Most importantly, your withdrawal rate should not be viewed independently from your investment strategy.  If you are going to rely on your retirement accounts for income over the next 20 or 30 years, those assets need an investment strategy designed around both your near-term income needs and your long-term goals.

The appropriate withdrawal rate isn't simply 4%, 5%, or 6%.

It is the withdrawal strategy that allows your retirement assets to support the retirement you actually want to live.

About Michael……...

Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.

Frequently Asked Questions About Retirement Withdrawal Rates

1. What is a safe withdrawal rate for retirement?
   There is no universally safe retirement withdrawal rate. The appropriate rate depends on your retirement age, investment allocation, expected longevity, inflation, taxes, Social Security and pension income, spending needs, and legacy goals. The 4% rule is commonly used as a planning reference point, but an individualized retirement projection can provide a better estimate of how much your particular portfolio may be able to support.
2. What is the 4% rule for retirement withdrawals?
   The traditional 4% rule generally involves withdrawing approximately 4% of your initial retirement portfolio during the first year and then adjusting the dollar amount for inflation in subsequent years. For a $1 million portfolio, the initial withdrawal would be $40,000. The rule is a planning guideline rather than a guarantee and may not be appropriate for every retiree.
3. Can I safely withdraw 5% per year in retirement?
   A 5% retirement withdrawal rate may be sustainable in some situations, but it depends on factors such as retirement length, investment performance, inflation, taxes, asset allocation, and whether spending can be adjusted during poor markets. Someone retiring at 60 and needing inflation-adjusted withdrawals for 35 years faces a different situation than someone beginning withdrawals much later in life.
4. Can I withdraw 6% a year from my retirement accounts?
   A 6% withdrawal rate may work in certain financial plans, but it generally creates greater risk of depleting a portfolio than a lower withdrawal rate, all else being equal. Retirement age, other income sources, portfolio allocation, spending flexibility, and longevity are especially important when evaluating higher withdrawal rates. Increasing investment risk simply to justify a higher withdrawal rate can introduce additional risks.
5. How much can I withdraw annually from a $1 million retirement portfolio?
   A 4% initial withdrawal from $1 million equals $40,000, a 5% withdrawal equals $50,000, and a 6% withdrawal equals $60,000. Those calculations tell you the amount of the withdrawal, but they do not determine whether the withdrawal will be sustainable. The answer depends on how long the money needs to last, investment returns, inflation, taxes, and your other retirement income.
6. How does sequence-of-returns risk affect retirement withdrawals?
   Sequence-of-returns risk refers to the impact that the timing of investment gains and losses can have on a portfolio when withdrawals are being taken. A major market decline during the first several years of retirement can be particularly damaging because retirees may have to sell investments at lower prices to fund expenses. Those assets are then unavailable to participate in a subsequent market recovery.
7. Should I invest more conservatively after I retire?
   Many retirees reassess their investment risk as they transition from accumulating assets to withdrawing them, but retirement does not necessarily mean eliminating investment risk. A retiree at age 60 could have a 30-year or longer time horizon, making long-term growth and inflation important considerations. An appropriate portfolio should balance near-term income needs with long-term growth, risk tolerance, and the retiree's overall financial situation.
8. Does the 4% retirement withdrawal rule include inflation?
   The traditional 4% rule generally assumes an initial withdrawal based on approximately 4% of the starting portfolio and then increases the dollar withdrawal over time to account for inflation. That is different from simply withdrawing exactly 4% of the portfolio's current balance every year. Understanding which method is being used is important when comparing retirement withdrawal strategies.
9. Should retirement withdrawal rates be calculated before or after taxes?
   It is important to distinguish between gross withdrawals and after-tax spending. A $50,000 distribution from a traditional IRA or 401(k) generally does not provide $50,000 of spendable cash because income taxes may be owed. Roth accounts and taxable brokerage accounts can have different tax treatment. A retirement plan should account for the taxes generated by withdrawals when determining how much needs to come out of the portfolio.
10. How do I determine the best withdrawal rate for my retirement accounts?
    Start by determining how much after-tax income you need from your investments after accounting for Social Security, pensions, part-time employment, rental income, and other sources. Then evaluate how long your portfolio may need to last, how it is invested, the impact of inflation and taxes, and how much spending flexibility you have during difficult markets. Rather than relying exclusively on a fixed percentage, consider testing your retirement plan under different market, inflation, spending, and longevity scenarios and updating the withdrawal strategy periodically throughout retirement.