Retirement is a significant milestone worth celebrating, but it’s not the end of financial planning. It’s a transition from earning income to relying on your savings. The goal is to ensure that your nest egg can fund your desired lifestyle in your golden years. 

The key to achieving this can be carefully managing spending in retirement. Taking out too much too soon can deplete your portfolio prematurely. Withdrawing too little could mean you miss out on some of the finer points of retirement, such as travel and hobbies. 

A healthy balance starts with adopting a safe withdrawal rate in retirement. That’s where the 4% rule comes into play. 

Read on to learn more about the 4% rule for retirement. We’ll also show you how to determine a withdrawal rate based on your preferences. That way, you can live the lifestyle of your choosing and ensure your savings will last throughout your sunset years. There is no one right way to approach retirement. Everyone’s situation is different and it is important to explore all options before making a decision. 

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What is a safe withdrawal rate in retirement?

A safe withdrawal rate in retirement is the percentage of your savings that you can withdraw annually without depleting your portfolio over your anticipated lifespan. Financial experts and retirement specialists typically recommend starting with 3% to 4% of your initial portfolio value in your first year. You adjust the withdrawal amount each year to account for inflation and help maintain your purchasing power. Remember these are just guidelines and actual results will vary.

There’s no one-size-fits-all withdrawal amount. It depends on several factors: 

• Market returns: Strong returns can allow your portfolio to grow despite withdrawals. Market downturns can quickly deplete your savings and force you to reduce spending. 
• Retirement length: With the average life expectancy continuing to rise, retirees need to plan accordingly so their savings last for longer periods.
• Inflation: The rising cost of living erodes your purchasing power over time. An effective withdrawal strategy must account for inflation to ensure you can cover future expenses. 
• Spending needs: Your personal lifestyle and spending habits — such as housing, healthcare, and travel — impact how much you need to withdraw. 
• Additional income sources: Access to Social Security, pensions, and annuities plays a role in how much you rely on investment withdrawals. 

The 4% rule: A popular starting point

Financial advisor William Bengen developed the 4% rule for retirement in the 1990s. Many retirees use it to determine their optimal withdrawal rate. 

It recommends withdrawing 4% of your total portfolio in your first year of retirement. For example, if your investments and savings are worth $1.2 million, that means you can take out $48,000 in the first year. 

After that, you adjust the dollar amount you withdraw each year to account for inflation. So if inflation in your second year of retirement is 3%, then you withdraw $49,440. This strategy draws from historical market data and helps preserve your spending power in retirement and support portfolio growth through investments.

4% Rule limitations

Although popular, the 4% rule has its limitations, so it should be considered a guideline rather than a strict rule. Here are the key downsides to consider. 

Rigid

The most notable limitation of the 4% rule is it assumes a fixed, inflation-adjusted withdrawal amount each year, regardless of portfolio performance. It also doesn’t account for variables like how your spending in retirement can fluctuate over time. Because retirement is dynamic, most retirees need to adjust spending as their needs change.

No adjustment for market performance

The 4% rule doesn’t account for the impact of market volatility. If markets plunge early in your retirement, you may have to adjust your withdrawal rate or risk depleting your savings. On the opposite side, when markets outperform, you may not withdraw enough and miss opportunities to spend more. 

An adaptable approach takes into account market conditions. Adjusting your withdrawal rate helps ensure your savings last for the entirety of your retirement. 

What is a reasonable rate of return after retirement?

One of the biggest shifts at the start of or before retirement is switching your mindset from one of aggressive growth to preservation and moderate returns. This shift often prompts retirees to reassess what kind of investment returns they can realistically expect in retirement.

One conservative approach is to adjust your asset allocation to one that is 40% stocks and 60% bonds, aiming for an annual rate of return between 3% and 5%. A more moderate approach looks to balance growth and safety with an allocation of 60% stocks and 40% bonds, aiming for an annual return of 5% to 7%. 

While these figures are the historical average, past performance doesn’t guarantee future results. Inflation, slower global growth, and lower interest rates could lead to underperformance in your portfolio. There’s also the matter of fees and taxes to consider, which reduce your net returns.

For those reasons, relying solely on investment returns for retirement income is risky. Diversification and guaranteed income sources can help reduce that risk.

How much should you withdraw each year?

Determining the amount to take out of your retirement savings each year depends on your age, savings, and retirement goals. For most retirees, starting with a withdrawal rate between 3% and 4% and adjusting based on personal circumstances is generally recommended. 

For example, a 67-year-old with $1.5 million who is projected to live until 90 might safely withdraw 4% of their portfolio ($60,000) in their first year. A 50-year-old who retires early with the same $1.5 million figure — and who is also expected to live until age 90 — may need to opt for a 3.5% withdrawal rate ($52,500) to ensure their savings last. 

Regardless of your situation, it's also important to factor in inflation adjustments of 2% to 3% annually to match rising costs. In bullish market years, it's common to increase withdrawals slightly higher than inflation. In bearish years, retirees may hold withdrawal amounts steady or reduce slightly to protect their portfolios. Remaining flexible helps mitigate the risks of overspending and underspending in retirement. 

How guaranteed income sources support your withdrawal plan

Even with a carefully crafted retirement plan, it's common for retirees to have concerns about longevity risk — the chance of outliving their savings. One strategy to protect against this is to include additional sources of guaranteed income, such as annuities. Many of these products provide a predictable income stream for life, regardless of how long you live or how the market performs. 

Here are some of the benefits of choosing an annuity. 

Covers essentials with guaranteed income

Annuities can provide a guaranteed income, which can cover the basics of life in retirement, such as housing, utilities, and groceries. This safety net helps to ensure stability in your retirement income even in the event of a significant market downturn. 

Reduces market risk

Fixed annuities offer downside protection against market volatility. They can provide predictable payouts that aren’t affected by stock and bond performance. This stability can help give you peace of mind and the chance to invest assertively in other places, helping your portfolio to grow and keep pace with inflation. 

Offers the chance to blend strategies

Diversification can be key to a healthy retirement plan. Annuities aim to provide a stable foundation, while stocks and bonds can offer growth potential. When paired with a flexible withdrawal strategy, this mix can support your short- and long-term needs. 

Secure a steady income in retirement with Gainbridge

Your retirement plan needs a sustainable withdrawal strategy. The 4% retirement rule is a good starting point. But it's also important to remain flexible and adapt your approach to the changing financial landscape. 

Some annuities can reduce stress by providing a guaranteed income for life. They complement your portfolio and can protect against the risk of outliving your savings. To explore how an annuity can fit into your retirement plan, explore Gainbridge today to find annuity options in a digital-first, no-hassle environment. 

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This article is intended for informational purposes only. It is not intended to provide, and should not be interpreted as, individualized investment, legal, or tax advice. For advice concerning your own situation please contact the appropriate professional. The GainbridgeⓇ digital platform provides informational and educational resources intended only for self-directed purposes. Guarantees are backed by the financial strength and claims-paying ability of the issuer.

Investing involves risk, including the possible loss of principal. Past performance is not indicative of future results.