Personally Invested In Your Future™

Understanding Your Withdrawal Rate: How Much Can You Afford to Spend in Retirement?
September 11, 2019

The concept of a retirement withdrawal rate is a critical component of planning for successful financial independence.  The withdrawal rate is a middle ground between two competing forces: maximizing cash flow in retirement, while simultaneously preserving the inflation-adjusted value of your investments over the long-term.

By withdrawing too little, you can deprive yourself of discretionary expenses that could be used to support a more enjoyable lifestyle or fail to make gifts to family members or causes you care about.  On the other hand, excessive withdrawals can risk a permanent and early depletion of your savings.

Sustainable Income

Historically, a 4% annual withdrawal rate from an investment portfolio has been a common rule of thumb for successfully maintaining financial independence throughout several decades of retirement living.  The thinking behind a 4% withdrawal rate is that it is sustainable.

By way of example, a “balanced” portfolio of stocks and bonds has historically earned in the high single digits of annualized return.  If a portfolio earns an average return of 7% per year over the long term, while inflation averages 3%, a 4% annual withdrawal rate will preserve the inflation-adjusted value of a family’s assets.

Financial planning research confirms that a 4-5% withdrawal rate is generally prudent, even when accounting for periods of stock market volatility.[1]  Still, there remain important reasons to be cautious and to consider other ways to test for sustainability.

The biggest risk to retirees is what is called “sequence of return” risk (as we wrote about in this article).  If the stock market suffers large losses at the very beginning of retirement, it could permanently impair your asset base for withdrawals.

Considering Your Whole Balance Sheet

Importantly, you may have wealth that is not accounted for in withdrawal rate calculations.  The result is that retirement calculations can underestimate your financial strength.  Vacation homes, future inheritance, and certain illiquid investments are all “secret weapons” that should be considered to augment a strong financial plan.

To improve the odds of building your own successful retirement plan, we recommend taking a holistic approach that incorporates the full scope of your wealth.  For example, the Retirement Shock Absorber® is our proprietary tool for retirement planning that factors in all of the assets on a family’s balance sheet that can be used for financial independence.

Dynamic Spending 

Research confirms that retirees in the early phase of their retirement typically spend more than retirees in their later years, even accounting for health care costs[2].  And this is generally a good thing, as it affords families the ability to live well and enjoy things like travel when they are healthy enough to do so.

Given the retirement spending fact pattern, it may make sense to incorporate a dynamic spending plan.  Retirees in their 60’s and 70’s should plan on spending more, and having a slightly higher withdrawal rate, than when they reach their 80’s and 90’s.  This is something we refer to as “front-loading” your retirement needs analysis.


Planning for sustainable withdrawals is one of the most important aspects of financial independence, but there is often more nuance needed than a simple rule of thumb can provide.  By incorporating all of your financial assets into a comprehensive plan, a clear picture will begin to emerge about what a robust retirement plan will need to include.  If you’d like to learn more or just get a second opinion of your situation, we would welcome the opportunity to begin a conversation.

[1] Suarez, E. Dante and Suarez, Antonio and Walz, D.T., The Perfect Withdrawal Amount: A Methodology for Creating Retirement Account Distribution Strategies (August 3, 2015). Available at SSRN: or

[2] JP Morgan Guide to Retirement 2019, p 23.  Online