Running out of money may be retirement’s scariest worry. How much can someone withdraw from their account each year without exhausting the resources they need to live comfortably throughout retirement? This debate has led to heated arguments—even among experienced financial planners.
Dave Ramsey, host of The Ramsey Show, drew ire when he claimed to be comfortable withdrawing 8% yearly. Others believe the withdrawal rate should be much lower. Who is correct? There is no one-size-fits-all answer, but analyzing market history can provide some guidance.
Deliberation aside, for many retirees, one of the primary reasons for working, saving, and investing is to eventually live off the spoils of sacrifice in pursuit of happiness and spend as much of the nest egg as possible without depleting reserves prematurely—in other words, to max out without running out.
The 4% rule, discovered by William Bengen, states that retirees who draw down 4% of their portfolio in the first year of retirement, adjusting every year for inflation, will likely see their money outlive them, assuming the portfolio has a 50-75% allocation to stocks.
Some families have low overhead and ample Social Security and pension income streams. They may only need to spend about 2% of their retirement assets yearly. Others may withdraw more than 4% here or there but can stick to 4% most of the time.
What happens if you consistently need more? Would it be riskier to withdraw 6% annually if that’s what it took to live your preferred lifestyle? The short answer is perhaps. With the right tactics, it may be possible to increase the probability of not running out of money over your lifetime, even at 6%.
Consider the following withdrawal scenarios.
4% Withdrawal Rate
Using Bloomberg Terminal software, this study from Capital Investment Advisors pored over market history beginning in 1927 to examine a 4% withdrawal rate with a $1 million starting portfolio value. Each year, the withdrawal rate was adjusted for inflation, and to reflect current economic conditions, all 2024 (and beyond) return assumptions were set to 5% for stocks (S&P 500), 3% for bonds (Bloomberg Aggregate Bond Index), and 3% for inflation (Consumer Price Index).
A 60% stock, 40% bond portfolio may increase the chances of sustaining your money for 30 years. The five worst scenarios for a 60/40 portfolio show the money lasting 30, 31, 37, 38, and 39 years.
Based on historical data, a portfolio with 100% allocated to stocks could last more than 30 years using a 4% withdrawal rate, although this is not guaranteed due to market volatility and other factors. However, the worst outcomes are much more treacherous. In a few instances, money only lasted 16 or 17 years.
In this instance, withdrawing 4% from the more conservative asset mix appears to be the most practical. Why expose yourself to the possibility of money running out in 16 years?
A 6% Withdrawal Rate
Using the same parameters, one might correctly assume that with a 6% withdrawal rate, adjusted annually for inflation, the money depletes quicker because more is being taken out each year. In this scenario, a balanced portfolio (60% stock, 40% bond) showed a 64% likelihood of lasting longer than 30 years. That’s not as comforting as the higher probability that a 4% withdrawal rate demonstrated, but with the right tactics, it places the 6% withdrawal rate in the decidedly possible camp.
Remarkably, the probability of a portfolio subsisting for more than 30 years at a 6% withdrawal rate goes up, not down, with a 100% stock allocation, jumping to 72%. The money endured more than 30 years 72% of the time, while 69% of the time, it lasted more than 35 years. Compare this to the balanced (60% stock, 40% bond) portfolio, where the money only survived 35 years or more 51% of the time.
Perhaps even more notable is that the worst outcomes of allocating 100% to stocks vs. using the 60/40 balanced portfolio weren’t too dissimilar. With 100% stock designation, the money ran out in 10, 11, and 14 years. With the balanced allotment, the three worst outcomes were all 16 years.
Bottom Line
A 4% withdrawal rate may contribute to the longevity of retirement funds, and while less common, a 6% rate could be successful in certain circumstances.
In the example cited, a 60/40 balanced portfolio with a 4% withdrawal rate builds the highest probability of a portfolio lasting at least 30 years. For those who need to take out 6%, market history suggests that allocating more to stocks, despite their increased volatility, enhances the probability of a portfolio lasting longer than 30 years.
Past performance is not always indicative of future results. Still, the withdrawal rate discussion can be replete with controversy, and relying on historical data can be helpful in serving as a guide. Unexpected circumstances may create the need for heftier portfolio withdrawals, and each person or family does their best to navigate those situations. Arming themselves with the viability of each option can be a productive way to make sound decisions to help put a secure and happy retirement within reach.
This information is provided to you as a resource for informational purposes only and is not to be viewed as investment advice or recommendations. Investing involves risk, including the possible loss of principal. There is no guarantee offered that investment return, yield, or performance will be achieved. Stock prices fluctuate, sometimes rapidly and dramatically, due to factors affecting individual companies, particular industries or sectors, or general market conditions. For stocks paying dividends, dividends are not guaranteed, and can increase, decrease, or be eliminated without notice. Fixed-income securities involve interest rate, credit, inflation, and reinvestment risks, and possible loss of principal. As interest rates rise, the value of fixed-income securities falls. Past performance is not indicative of future results when considering any investment vehicle. This information is being presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. There are many aspects and criteria that must be examined and considered before investing. Investment decisions should not be made solely based on information contained in this article. This information is not intended to, and should not, form a primary basis for any investment decision that you may make. Always consult your own legal, tax, or investment advisor before making any investment/tax/estate/financial planning considerations or decisions. The information contained in the article is strictly an opinion and it is not known whether the strategies will be successful. The views and opinions expressed are for educational purposes only as of the date of production/writing and may change.
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