You've saved diligently for retirement throughout your working years, and now it's time to enjoy the fruits of your labor. But that doesn't mean it's time to stop planning for the future. Your retirement savings will probably need to last you 20 years or more, and if you use them up too fast, you could find yourself struggling in the final years of your life. In order to avoid this, you need to decide on a safe withdrawal rate.

But this is easier said than done. There are many unknowns, including your life expectancy, investment returns, the rate of inflation, and how much money you have saved up to begin with. All these variables make it impossible to say with absolute certainty how much money you can safely spend in retirement. But you can come up with an estimate. Here's a short guide on how to do this.

White-haired man thinking

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The conventional wisdom

Conventional wisdom says that you're safe to withdraw 4% of your retirement portfolio during your first year of retirement and then adjust that amount each year to keep pace with inflation. So if you have $1 million in savings, you would withdraw $40,000 this year. If the inflation rate were 3%, then next year you would add 3% to that $40,000, withdrawing $41,200.

Many people like this formula because it's simple to understand and calculate. But simple is not always the same thing as accurate. Research from Fidelity indicates that based on historical data, there's a 90% chance that you would have enough money to last you through a 28-year retirement if you used a 4% withdrawal rate. But that still leaves a 10% chance that you might not. For this reason, some argue that it's safer to stick with a 3% withdrawal rate. Of course, if you go this route, it's entirely possible that you could end up restricting yourself to a lower standard of living than necessary.

An alternative strategy

Another approach to making retirement savings withdrawals has been proposed by the Boston College Center for Retirement Research. It suggests using the IRS's Required Minimum Distributions (RMDs) as a guideline. RMDs are the minimum amount that you must withdraw from your a traditional IRA or 401(k) each year beginning at age 70 1/2. The Center for Retirement Research extrapolated from this data to come up with a safe withdrawal rate starting at age 65. Here's a look at what it recommends:

Age

Withdrawal Percentage

Age

Withdrawal Percentage

65

3.13%

83

6.13%

66

3.22%

84

6.45%

67

3.31%

85

6.76%

68

3.42%

86

7.09%

69

3.53%

87

7.46%

70

3.65%

88

7.87%

71

3.77%

89

8.33%

72

3.91%

90

8.77%

73

4.05%

91

9.26%

74

4.20%

92

9.80%

75

4.37%

93

10.42%

76

4.55%

94

10.99%

77

4.72%

95

11.63%

78

4.93%

96

12.35%

79

5.13%

97

13.16%

80

5.35%

98

14.08%

81

5.59%

99

14.93%

82

5.85%

100

15.87%

Data source: Center for Retirement Research.

This conservative approach is also simple to understand, and it increases your yearly allowance as you age, which can be helpful if you're concerned about healthcare expenses toward the end of your life.

The drawback to this strategy is that, in the interest of caution, you have a much lower withdrawal rate in the early years of your retirement. This is the time when many retirees want to travel and be active, so you may not want to restrict yourself to such a small withdrawal amount. The researchers suggest that to deal with this issue, you withdraw all of your interest and dividends for the year in addition to the RMD amount.

So how much can you safely withdraw?

It's impossible to say how much money you'll need to see you through your retirement, but it's best to err on the side of caution. The approaches listed above are a good starting point, but you may want to adjust them to suit your lifestyle. Perhaps you want to travel for a year or two before settling into a quiet retirement. You may need to withdraw a little more in those years and then be more conservative in the years following.

If you're still worried about running out of retirement savings, it may be wise to sit down with a financial advisor, who may be able to offer more specific advice based on your investment portfolio and long-term goals.

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