When you retire, there are many decisions to make that will shape your financial life. One of the most important relates to your withdrawal rate -- the amount you take out of your retirement accounts. You don't want to withdraw too much and potentially run out of money too soon. But withdrawing too little can leave you without enough income.
When you make your choice, it's helpful to understand exactly how much money different withdrawal strategies can produce for you. This step is crucial in assessing whether your nest egg is large enough to provide a comfortable standard of living.
The chart below gives you an idea of what income your investment account can produce, which makes it one of the most important retirement charts you'll ever see.
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How much income can your savings produce at a safe withdrawal rate?
There are different approaches to determining a safe withdrawal rate, but one of the most common is to follow the 4% rule. This rule of thumb suggests you won't run out of money if you take 4% out of your retirement investment accounts during the first year of retirement and then increase your withdrawals each year to keep pace with inflation.
While the 4% rule won't work for everyone, it can give you a good idea of the amount of income a retirement nest egg might produce depending on the size of your account balance. The table below shows the estimated income you'd end up with, before taxes, based on a 4% withdrawal rate and the amount saved.
|
Retirement Account Balance |
Annual Income Following 4% Rule |
|
$1,000,000 |
$40,000 |
|
$750,000 |
$30,000 |
|
$500,000 |
$20,000 |
|
$250,000 |
$10,000 |
|
$100,000 |
$4,000 |
|
$50,000 |
$2,000 |
Calculations by author.
This is the most important retirement table you'll ever see because it underscores just how little money even a large nest egg can produce at a safe withdrawal rate. And that's especially true if you're planning for a retirement that's far into the future.
While $40,000 in annual income may seem fine when combined with Social Security, if you aren't going to retire for 25 years, your $40,000 in annual income would only have the buying power of around $24,000 of today's dollars, assuming a 2% annual inflation rate.
Make sure your nest egg produces the income you need
As the table above makes clear, you might need to save a lot more than you think in order to provide sufficient income in combination with Social Security -- and without a significant risk of running your account dry.
To make sure you're fully prepared for retirement, set your savings goals early while making a realistic assessment of how much income you'll actually need. Then prioritize accomplishing those goals by investing throughout your career. By taking these steps, you can maximize the chances your portfolio will provide the requisite funds throughout your life.
