Mid section of a senior man calculating financial budget
Getty Images
It has been a long-held rule of thumb among retirement experts that, in order for an individual's retirement assets to last a lifetime, a retiree should withdraw only 4 percent of his portfolio annually -- and increase the draw-down amount by 3 percent annually to keep up with inflation.

To illustrate, if a retiree has a $100,000 portfolio, in the first year of retirement he should withdraw $4,000. Then $4,120 the next year ($4,000 plus an additional 3 percent for inflation), followed by $4,244 the year after that ($4,120 plus an extra 3 percent for inflation). And so on.

This strategy originated in 1994 with William Bengen, a financial planner from California. He determined this to be the ideal rate at which a portfolio of half large-cap stocks and half U.S. Treasuries can be drawn down to last 30 years. (In other words, long enough to survive nearly all retirements.)

But the times, as they say, are a-changin'.

According to a recent article published on CNBC.com, even Bengen himself "isn't convinced the rule still applies." He worries that artificially low interest rates and exaggerated stock market volatility could render his 4 percent rule outdated.

There's also uncertainty about future returns. If the stock market is not as lucrative in the next few decades as it has, on average, been for the past century,
the 4 percent rule will be too aggressive. That's why some financial advisers are now recommending a 3 percent withdrawal rate.

Still others see both the 3 and 4 percent withdrawal rate recommendations as too conservative. According to a recent Wall Street Journal article, the amount of living expenses the 3 percent and 4 percent rules are based on might be "overestimating the real costs of retirement by as much as 20 percent." That's because, according to research from the Employee Benefit Research Institute, household expenses "steadily decline with age," falling 19 percent by age 75, 34 percent by 85, and 52 percent by 95. Which is why some experts are now saying that a retiree could safely withdraw even more than 5 percent a year.

Confused yet?

The Right Withdrawal Rate for You

The 4 percent withdrawal rule is a good starting point for retirement planning. But you shouldn't just stop there. There are many variables at play in determining what works for you: A 3 percent withdrawal rate may be necessary for one retiree, while another might be able to sustain 5 percent withdrawals or higher.

To determine your best withdrawal rate takes some serious thought and calculating. Here are some things to keep in mind as you think through what your own scenario will be.

The 4 percent rule doesn't apply if you haven't saved enough. According to the National Institute on Retirement Security, the typical 55-to-64-year-old (folks nearing retirement) has only $12,000 in savings.
And 4 percent of that is a measly $480 a year -- hardly enough to make a difference in even the most conservative retirement budget. If that's you, you're looking at either postponing retirement or saving more aggressively -- ideally, both. But even both might not get you to a nest egg big enough to meet your needs under the 4 percent rule.

The numbers are dependent on your life expectancy. It's impossible to know exactly how much life you have left -- but if your family consists of centenarians, a lower withdrawal rate would be wise. The converse is true if none of your relatives have lived past 70. You want your money to last a little bit longer than you do. Making that happen may mean adjusting your withdrawal rate as you age.

Your ideal withdrawal rate depends heavily on your portfolio's growth rate. Conservative portfolios (those with more than 60 percent of the assets in bonds) can't grow as rapidly as aggressive portfolios (in which stocks make up the majority). Therefore, conservative investors should withdraw less -- while those able to stomach the volatility of being heavily in stocks could probably withdraw 5 percent or more each year -- if your stocks are doing well. But remember, past stock market performance is no guarantee of future performance. And you may have to adapt on the fly.

Your withdrawal rate should depend on the amount of money you need. It should be obvious, but don't pull cash out of your portfolio to spend just because of a guideline. If you need less than 4 percent or even less than 3 percent of your portfolio to cover those living expenses that Social Security does not, let the money stay invested and growing.

Start running different growth and withdrawal scenarios today. The sooner you do, the more time you'll have to adjust your plan for a comfortable retirement.

Motley Fool contributing writer Adam Wiederman has no position in any stocks mentioned.



Increase your money and finance knowledge from home

Managing your Portfolio

Keeping your portfolio and financial life fit!

View Course »

Building Credit from Scratch

Start building credit...now.

View Course »

Add a Comment

*0 / 3000 Character Maximum

34 Comments

Filter by:
alfredschrader

A key to achieving your retirement goals is to make your money go as far as you can.
On here is an article featuring grapefruit being prepared with a serrated segment knife.
This knife is used to "loosen" the grapefruit segments for eating. The problem is using this segment knife, it's almost impossible to get all of the luscuious grapefruit flesh out and a lot of it ends up in the trash.
Here is a new efficient way to have grapefruit with your breakfast:
Lay the whole grapefruit on its side on your cutting board. With a chef's knife cut off the stem and blossom ends creating two "flats". The idea is to cut just far enough to expose the flesh but not too far and lose too much of it.
Lay the grapefruit solidly onto a flat side and make curved cuts only through the skin and bitter pith all the way around which results in this beautiful grapefruit flesh globe.
Carefully hold this on its side and slice it into discs. Shingle out the discs on your plate and dust with sugar. Serve. There's no digging with a spoon, most of the bitter white membrane is gone, and the juice doesn't release until the flesh is in your mouth. And the only thing going into the trash is the pithy skin.

January 31 2014 at 6:22 AM Report abuse +1 rate up rate down Reply
SPQR

You just have to plan when to die. In Soylent green you just went to the mortuary and got an injection and watched a nice film of a sunset with birds and then you were gone. People will be begging for this in 10 years. Soooo go have some fun tomorrow while you can

January 30 2014 at 11:11 PM Report abuse -1 rate up rate down Reply
weilunion

Now that the 'free market' has ruled the country, the average retirement age is 73. Up 11 years from 62. For those students in debt, they will never retire.

All of this advice on retirement is corporate swill. Debt from generation to generation means one will never retire until they 'buy the box'

January 30 2014 at 9:04 PM Report abuse -1 rate up rate down Reply
gtm1549

there are a lot of things wrong today and that is just one of them.

January 30 2014 at 6:16 PM Report abuse +1 rate up rate down Reply
1 reply to gtm1549's comment
weilunion

How sad, all about individuals and attacking them but nothing about the real issue: ther is no work in America other than precarious work and thus no retirement.

January 30 2014 at 9:05 PM Report abuse +1 rate up rate down Reply
bharrison777

They didn't figure in Senator Polosi' wealth tax that will tax your retirement account because the Democrats see to much money they need to grab from people that have worked hard and saved.
Need to figure in the Democrats socialist money grab. It's going to happen folks.

January 30 2014 at 5:01 PM Report abuse rate up rate down Reply
Cate

After losing my job in the recession and having to depete my savings, I went back to school one class at a time and I am about to graduate with an RN degree. I have a job that I am happy with again but making a lot less from before. I realized that I needed to secure my future just in case something like this happens again. I don't want to have to start over when I'm 60.

January 30 2014 at 2:27 PM Report abuse +1 rate up rate down Reply
1 reply to Cate's comment
mountainlora

I'm 60. And guess what. Starting over.

January 31 2014 at 2:53 AM Report abuse rate up rate down Reply
Iselin007

Each of these articles lately seem to gloss over the root of the problems which can be traced to the decline of the middle class via outsourcing.

A triage seems to be taking place to just do away with every citizen over age 35 and replace them with foreign nationals which also explains the drive for amnesty and higher caps on visa quotas.

January 30 2014 at 1:25 PM Report abuse +2 rate up rate down Reply
1 reply to Iselin007's comment
weilunion

Yes, good point. These articles are all part of the American Scheme. There is no retirement, jsut low paying jobs and debt. Outsourcing and insourcing along withs technology has replaceed American workers. The ruling elite no longer need America. They have a market of 7 billion to service and with Americans broke, one step from homelessness and not too smart, those in power know they are not needed.

January 30 2014 at 9:07 PM Report abuse +1 rate up rate down Reply
Iselin007

As the displacement of American tech workers sweeps westward from the eastern states millions will feel as the factory workers did complicating matters for millions of Americans left will little choice for for good wages.

January 30 2014 at 1:08 PM Report abuse +2 rate up rate down Reply
1 reply to Iselin007's comment
weilunion

Yes, these articles about retirement are simply propaganda. There is no work and with technology, outsourcing and insorucing the American peole will find no work and if they do, it will be precarious work.

The ruling elite know that Americans are no longer needed. 340 million people compared to a market of 7 billion? Where do you think the capitalists will get their cheap labor and new consumers? Not from Americans. They are simply not needed anymore.

January 30 2014 at 9:09 PM Report abuse rate up rate down Reply
1 reply to weilunion's comment
SPQR

except Americans are buying all the crap being made overseas and across borders. If we don't buy made in China then the Chinese and others cannot buy anything

January 30 2014 at 10:59 PM Report abuse rate up rate down
sktn77a

Hmmmmmm................... So what does the article say? Nothing - as usual!

January 30 2014 at 1:04 PM Report abuse +2 rate up rate down Reply
Iselin007

dickens.cider
Shovel ready infrastructure jobs?

Obama sees you as a liability.

He wasn 't thinking of the babyboomers and their off springpermanent in the job creation because the tech jobs were being filled by H1B as the companies were displacing permanent with contract workers

January 30 2014 at 12:59 PM Report abuse -2 rate up rate down Reply