How much can you spend in retirement without running out of money? The 4% rule is a common rule of thumb, but we think you can do better by finding your personalized spending rate. Show
You've worked hard to save for retirement, and now you're ready to turn your savings into a paycheck. But how much can you afford to withdraw from savings and spend? If you spend too much, you risk being left with a shortfall later in retirement. But if you spend too little, you may not enjoy the retirement you envisioned. One frequently used rule of thumb for retirement spending is known as the 4% rule. It's relatively simple: You add up all of your investments, and withdraw 4% of that total during your first year of retirement. In subsequent years, you adjust the dollar amount you withdraw to account for inflation. By following this formula, you should have a very high probability of not outliving your money during a 30-year retirement, according to the rule. For example, let's say your portfolio at retirement totals $1 million. You would withdraw $40,000 in your first year of retirement. If the cost of living rises 2% that year, you would give yourself a 2% raise the following year, withdrawing $40,800, and so on for the next 30 years. Source: Schwab Center for Financial Research. Assumes an initial portfolio value of $1 million. Withdrawals increase annually by 2%. The example is hypothetical and provided for illustrative purposes only. While the 4% rule is a reasonable place to start, it doesn't fit every investor's situation. A few caveats:
Beyond the 4% ruleHowever you slice it, the biggest mistake you can make with the 4% rule is thinking you have to follow it to the letter. It can be used as a starting point—and a basic guideline to help you save for retirement. If you want $40,000 from your portfolio in the first year of a 30-year retirement, increasing annually with inflation, with high confidence your savings will last, using the 4% rule would require you to have $1 million dollars in retirement. But after that, we suggest adopting a personalized spending rate, based on your situation, investments, and risk tolerance, and then regularly updating it. Further, our research suggests that, on average, spending decreases in retirement. It doesn't stay constant (adjusted for inflation) as suggested by the 4% rule. How do you determine your personalized spending rate? Start by asking yourself these questions: 1. How long do you want to plan for?Obviously you don't know exactly how long you'll live, and it's not a question that many people want to ponder too deeply. But to get a general idea, you should carefully consider your health and life expectancy, using data from the Social Security Administration and your family history. Also consider your tolerance for managing the risk of outliving your assets, access to other resources if you draw down your portfolio (for example, Social Security, a pension, or annuities), and other factors. This online calculator can help you determine your planning horizon. 2. How will you invest your portfolio?Stocks in retirement portfolios provide potential for future growth, to help support spending needs later in retirement. Cash and bonds, on the other hand, can add stability and can be used to fund spending needs early in retirement. Each investment serves its own role, so a good mix of all three—stocks, bonds and cash—is important. We find that asset allocation has a relatively small impact on your first-year sustainable withdrawal amount, unless you have a very conservative allocation and long retirement period. However, asset allocation can have a significant impact on the portfolio's ending asset balance. In other words, a more aggressive asset allocation may have the potential to grow more over time, but the downside is that the "bad" years can be worse than with a more conservative allocation. Asset allocation can have a big impact on a portfolio's ending balanceSource: Schwab Center for Financial Research. Assumes a constant asset allocation, a 75% confidence level, and withdrawals growing by a constant 2.47% over 30 years. Assumes a starting balance of $1 million. Confidence level is defined as the number of times the portfolio ended with a balance greater than zero. See disclosures for additional disclosures on allocations and capital market estimates. The example is hypothetical and provided for illustrative purposes only. It is not intended to represent a specific investment product and the example does not reflect the effects of taxes or fees. Remember, choosing an appropriate mix of investments may not be just a mathematical decision. Research shows that the pain of losses exceeds the pleasure in gains, and this effect can be magnified in retirement. Picking an allocation you're comfortable with, especially in the event of a bear market, not just the one with the greatest possibility to increase the potential ending asset balance, is important. 3. How confident do you want to be that your money will last?Think of a confidence level as the percentage of times in which the hypothetical portfolio did not run out of money, based on a variety of assumptions and projections regarding potential future market performance. For example, a 90% confidence level means that, after projecting 1,000 scenarios using varying returns for stocks and bonds, 900 of the hypothetical portfolios were left with money at the end of the designated time period—anywhere from one cent to an amount more than the portfolio started with. We think aiming for a 75% to 90% confidence level is appropriate for most people, and sets a more comfortable spending limit, if you're able to remain flexible and adjust if needed. Targeting a 90% confidence level means you will be spending less in retirement, with the trade-off that you are less likely to run out of money. If you regularly revisit your plan and are flexible if conditions change, 75% provides a reasonable confidence level between overspending and underspending. 4. Will you make changes if conditions change?This is the most important issue, and one that trumps all of the issues above. The 4% rule, as we mentioned, is a rigid guideline, which assumes you won't change spending, change your investments, or make adjustments as conditions change. You aren't a math formula, and neither is your retirement spending. If you make simple changes during a down market, like lowering your spending on a vacation or reducing or cutting expenses you don't need, you can increase the likelihood that your money will last. Putting it all togetherAfter you've answered the above questions, you have a few options. The table below shows our calculations, to give you an estimate of a sustainable initial withdrawal rate. Note that the table shows what you'd withdraw from your portfolio this year only. You would increase the amount by inflation each year thereafter—or ideally, re-review your spending plan based on the performance of your portfolio. (We suggest discussing a comprehensive retirement plan with an advisor, who can help you tailor your personalized withdrawal rate. Then update that plan regularly.) We assume that investors want the highest reasonable withdrawal rate, but not so high that your retirement savings will run short. In the table, we've highlighted the maximum and minimum suggested first-year sustainable withdrawal rates based on different time horizons. Then, we matched those time horizons with a general suggested asset allocation mix for that time period. For example, if you are planning on needing retirement withdrawals for 20 years, we suggest a moderately conservative asset allocation and a withdrawal rate between 4.9% and 5.4%. The table is based on projections using future 10-year projected portfolio returns and volatility, updated annually by Charles Schwab Investment Advisor, Inc. (CSIA). The same annually updated projected returns are used in retirement saving and spending planning tools and calculators at Schwab. Choose a withdrawal rate based on your time horizon, allocation, and confidence levelSource: Schwab Center for Financial Research, using Charles Schwab Investment Advisory's (CSIA) 2022 10-year long-term return estimates and volatility for large-cap stocks, mid/small-cap stocks, international stocks, bonds and cash investments. CSIA updates its return estimates annually, and withdrawal rates are updated accordingly. See the disclosures below for a summary of the Conservative, Moderately Conservative, Moderate, and Moderately Aggressive asset allocations. The Moderately Aggressive allocation is not our suggested asset allocation for any of the time horizons we use in the example. The example is hypothetical and provided for illustrative purposes only. It is not intended to represent a specific investment product and the example does not reflect the effects of taxes or fees. Past performance is no guarantee of future results. Again, these spending rates assume that you will follow that spending rule throughout the rest of your retirement and not make future changes in your spending plan. In reality, we suggest you review your spending rate at least annually. Schwab's suggested allocations and withdrawal rateSchwab's suggested allocations and withdrawal rate
Source: Schwab Center for Financial Research. Initial withdrawal rates are based on scenario analysis using CSIA’s 2022 10-year long-term return estimates. They are updated annually, based on interest rates and other factors, and withdrawal rates are updated accordingly.1 Moderately aggressive removed as it is generally not recommended for a 30-year time period. The example is provided for illustrative purposes. Schwab Center for Financial Research. Initial withdrawal rates are based on scenario analysis using CSIA's 2022 10-year long-term return estimates. They are updated annually, based on interest rates and other factors, and withdrawal rates are updated accordingly.1 Moderately aggressive removed as it is generally not recommended for a 30-year time period. The example is provided for illustrative purposes. Here are some additional items to keep in mind:
Stay flexible—nothing ever goes exactly as plannedOur analysis—as well as the original 4% rule—assumes that you increase your spending amount by the rate of inflation each year regardless of market performance. However, life isn't so predictable. Remember, stay flexible, and evaluate your plan annually or when significant life events occur. If the market performs poorly, you may not be comfortable increasing your spending at all. If the market does well, you may be more inclined to spend more on some "nice to haves," medical expenses, or on leaving a legacy. Bottom lineThe transition from saving to spending from your portfolio can be difficult. There will never be a single "right" answer to how much you can withdraw from your portfolio in retirement. What's important is to have a plan and a general guideline for spending—and then monitor and adjust, based on your circumstances, as necessary. The goal, after all, isn't to worry about complicated calculations about spending. It's to enjoy your retirement. 1 The tables show sustainable initial withdrawal rates calculated by simulating 1,000 random scenarios using different confidence levels (i.e., probability of success), time horizons and asset allocation. "Confidence" is calculated as the percentage of times where the portfolio's ending balance was greater than The tables show sustainable initial withdrawal rates calculated by simulating 1. The initial withdrawal amount, in dollars, is then increased by a 2.47% rate of inflation annually. Returns and withdrawals are calculated before taxes and fees. The moderately aggressive allocation is left out of the summary table, because it is not our suggested asset allocation for any of the time horizons we use as an example. For illustration only. We can help you with retirement income.Learn more More from Charles SchwabIRA Roth vs. Traditional IRAs: Which is Right for You?Traditional and Roth IRAs have distinct requirements, including eligibility and contribution limits. Here's a guide to help you decide what may be better for you. Retirement Income Build Tax-Free Savings Using Roth ConversionsPeriodically converting a portion of your retirement savings into Roth assets can give you a flexible source of income and help lower the taxes you pay over time. Retirement Income 3 Retirement Income Mistakes to AvoidAvoiding simple mistakes can extend the life of your portfolio. Related topicsRetirement Retirement Income Portfolio Management The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision. All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed. Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve. Investing involves risks, including loss of principal. IMPORTANT: The projections or other information generated regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results and are not guarantees of future results. Asset allocation and diversification strategies do not ensure a profit and do not protect against losses in declining markets. Past performance is no guarantee of future results and the opinions presented cannot be viewed as an indicator of future performance. Fixed income securities are subject to increased loss of principal during periods of rising interest rates. Fixed income investments are subject to various other risks, including changes in credit quality, market valuations, liquidity, prepayments, early redemption, corporate events, tax ramifications and other factors. International investments involve additional risks, which include differences in financial accounting standards, currency fluctuations, geopolitical risk, foreign taxes and regulations, and the potential for illiquid markets. The Schwab Center for Financial Research is a division of Charles Schwab & Co., Inc. Charles Schwab Investment Advisory, Inc. ("CSIA") is an affiliate of Charles Schwab & Co., Inc. ("Schwab"). The tables show sustainable initial withdrawal rates calculated by simulating 1,000 random scenarios using different confidence levels (i.e., probability of success), time horizons and asset allocation. "Confidence" is calculated as the percentage of times where the portfolio's ending balance was greater than $0. The initial withdrawal amount, in dollars, is then increased by a 2.47% rate of inflation annually. Returns and withdrawals are calculated before taxes and fees. For illustration only. Performance may be affected by risks associated with non-diversification, including investments in specific countries or sectors. Additional risks may also include, but are not limited to, investments in foreign securities, fixed income, small capitalization securities and commodities. Each individual investor should consider these risks carefully before investing in a particular security or strategy. Asset allocations for Schwab model portfolios are as follows (example is hypothetical and provided for illustrative purposes only): Conservative (Cash: 30%, Bonds, 50%, Large Cap Stocks 15%, Mid/Small Cap Stocks 0%, and International Stocks 5%), Moderately Conservative (Cash: 10%, Bonds, 50%, Large Cap Stocks 25%, Mid/Small Cap Stocks 5%, and International Stocks 10%), Moderate (Cash: 5%, Bonds, 35%, Large Cap Stocks 35%, Mid/Small Cap Stocks 10%, and International Stocks 15%), and Moderately Aggressive (Cash: 5%, Bonds, 15%, Large Cap Stocks 45%, Mid/Small Cap Stocks 15%, and International Stocks 20%). Portfolio level capital market estimates and standard deviation* Conservative: Return Estimate 3.27%, Standard Deviation 3.35%; Moderately Conservative: Return Estimate 4.57%, Standard Deviation 6.21%; Moderate: Return Estimate 5.79%, Standard Deviation 9.19%; Moderately Aggressive: Return Estimate: 6.99%, Standard Deviation: 12.27%. *Standard deviation is a statistical measure that calculates the degree to which returns have fluctuated over a given time period. A higher standard deviation indicates a higher level of variability in returns. What is the best age to retire at?The normal retirement age is typically 65 or 66 for most people; this is when you can begin drawing your full Social Security retirement benefit. It could make sense to retire earlier or later, however, depending on your financial situation, needs and goals.
Is $600000.00 enough for retirement?You expect to withdraw 4% each year, starting with a $24,000 withdrawal in Year One. Your money earns a 5% annual rate of return while inflation stays at 2.9%. Based on those numbers, $600,000 would be enough to last you 30 years in retirement.
What is a good dollar amount for retirement?Financial planners often recommend replacing about 80% of your pre-retirement income to sustain the same lifestyle after you retire. This means that, if you earn $100,000 per year, you'd aim for at least $80,000 of income (in today's dollars) in retirement.
What is the 4 rule in retirement?One frequently used rule of thumb for retirement spending is known as the 4% rule. It's relatively simple: You add up all of your investments, and withdraw 4% of that total during your first year of retirement.
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