You’ve hit the million-dollar mark in your retirement savings. Congratulations! But now comes the tricky part: figuring out how much you can safely withdraw each year without running out of money.
Let’s break it down with some expert advice.
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The 4% Rule: A Starting Point
Brandy Burch, CEO at Benefitbay, suggested starting with the tried-and-true 4% rule.
“If you’ve got $1 million saved up for retirement, a good rule of thumb is the 4% rule, which means you could withdraw about $40,000 per year,” she said. “This method aims to give you a steady income while keeping your nest egg intact over a 30-year retirement.”
But before you start planning your $40,000-a-year lifestyle, there’s more to consider.
The Guardrails Method: A More Flexible Approach
Tyler Meyer, founder at Retire to Abundance, introduced us to a more dynamic strategy called the guardrails method.
“In our firm, we utilize the guardrails method which is based on the research of Jonathan Guyton and William Klinger,” he explained. “This method starts with an initial withdrawal rate, similar to the 4% rule, but includes ‘guardrails’ to adjust withdrawals annually based on the portfolio’s performance.”
According to Meyer, this method could allow for a higher initial withdrawal rate of about 5%, or $50,000 in the first year. But here’s the important part: It’s not set in stone.
“If the portfolio performs well, you can increase your withdrawals, potentially enjoying a higher standard of living,” he said. “Conversely, if the market underperforms, the method suggests reducing withdrawals to preserve the portfolio’s longevity.”
It’s all about working with what you have.
Know Your Spending First
Before you get too excited about withdrawal rates, Wayne K. Maslyk Jr., president and CEO at Great Lakes Benefits and Wealth Management, suggested taking a step back.
“First and most importantly, whether you’re a pre-retiree or a retiree, you must know where your money went for a 12-month period,” he shared.
Maslyk recommended a detailed review of your spending habits, including everything from housing and healthcare to those “Mom and Dad bailouts” for adult kids.
Once you have your number — whether it’s annually or monthly — you know what you need to live the way you want to live.
Adjusting Your Withdrawal Rate
After you’ve nailed down your spending habits, Maslyk said you should compare that number to your fixed income sources. If there’s a shortfall, he offered a range of withdrawal rates based on your goals:
“I suggest using a 3% withdrawal rate from your life savings as a subsidy if you want to preserve your nest egg for your heirs, or a 4% or 5% withdrawal rate if consuming or eating into your nest egg is OK,” he shared.
RMD Method
Dr. Barbara O’Neill, the owner and CEO of Money Talk and expert contributor at Annuity.org, said the required minimum distributions (RMD) method can be the way to go.
“The revised 2022 RMD table includes retirement plan distributions through age 120+,” O’Neill explained. “Many people with tax-deferred accounts use their RMD amount as their annual withdrawal because it is easy to calculate, they have to take the money out anyway, and it virtually assures they will not exhaust their assets.”
Here’s how it works: If someone is age 73 with $1 million, the RMD would be calculated as follows: $1,000,000 ÷ 26.5 = $37,736 (rounded). Each year, the RMD amount will vary, depending on changes in investment performance and divisors that get smaller as retirees age.
Keep in mind that once you reach RMD age, these mandatory withdrawals take precedence over other methods if they’re greater than other calculated amounts.
Life Expectancy Method
This approach takes a more personalized view of your retirement timeline.
“This is where people use one or more online calculators to estimate their life expectancy based on individual factors such as personal health status, health habits (e.g., exercise and smoking), and family health history,” O’Neill shared. “Then they divide their nest egg by the number of years they think they have left.”
For example, if you estimate you have 20 years left, your annual withdrawal would be $50,000 ($1 million ÷ 20 years).
Monte Carlo Calculations
For those who like a more data-driven approach, O’Neill suggested Monte Carlo simulations.
“These are computer simulations that use statistical techniques and data about past investment performance,” she explained. “Monte Carlo simulations calculate the probability of success — i.e., not running out of money during your lifetime — and can provide direction about how much money to withdraw annually to have a high probability of success based on the amount of assets and investment performance.”
If the probability of success is low, you might need to adjust your strategy, such as spending less or seeking higher investment returns.
Whatever you choose, you’ll likely pull out between $30,000 and $50,000 a year to live. Of course, you’ll most likely want to talk to a final advisor to make sure you’re on the right track for you.
