How much money should you withdraw from your retirement savings each year to live out your golden years in comfort?
That’s a question that plays on the minds of many Americans in or near retirement — and the answer can depend on who you ask.
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For years, financial planners and retirees have relied on the “4% rule” — coined in 1994 by financial adviser and author Bill Bengen — which states retirees should plan to withdraw 4% of their assets every year, increasing or decreasing that distribution annually based on inflation.
But in today’s challenging economic climate where Americans are tired of battling high inflation, interest rate hikes, market volatility and other challenges, the feasibility of the 4% rule has been called into question — most recently by personal finance expert Suze Orman.
“It doesn’t work anymore,” she told Moneywise in a May 16 interview. “I think it’s very dangerous.”
Orman shared how much money she thinks you should withdraw each year in retirement — and it differs from the most recent figure given by Bengen himself.
Here’s what you need to know to figure out what withdrawal strategy works best for you.
Orman’s alternative to the 4% rule
The money maven says she would “not be using the 4% rule on any level.”
Why? Because there’s no way to predict what’s going to happen once you are actually living the retired life, she explains.
Economic volatility could change the cost of living to the extent that 4% doesn’t meet your needs. There could be stock market swings that impact the value of your retirement portfolio, or further interest rate hikes that make any debt or loans that you hold more expensive.
You could face personal challenges like a health problem that requires a big pile or steady stream of cash. The uncertainties are endless, which is why Orman advises Americans to “take the least amount possible out of retirement accounts.”
Orman says the less money you withdraw each year, the “better off you are.”
If you need a percentage target to hit, Orman suggests you only withdraw up to 3% of your nest egg each year.
At the same time, she encourages Americans to “work until at least 70 or longer, so that your assets have more of a chance to build up” and delay taking Social Security benefits until the age of 70 so that you receive the maximum monthly sum.
“Stop this: ‘Oh, I’m going to retire at 60. I’m going to start claiming Social Security at 62,’” she says.
The 4% rule creator says the opposite
Bengen based his retirement rule on several decades worth of statistics on retirement spending and stock and bond returns — which proved that retirees could reasonably expect their funds to last 30 years or longer if they withdrew about 4% from their nest eggs per year once you officially retire.
But he’s recently been compelled to revisit and update the rule given the current economic climate.
That’s because his original research only included two asset classes: Treasury bonds and large-cap stocks. When he added a third class, small-cap stocks, he said 4.5% would be a safe withdrawal rate.
But now, factoring in the impact of sky-high inflation, Bengen has argued that 4% might not cut it. In an appearance on the Bogleheads Live podcast in December, Bengen revealed he’s upped his own withdrawal rate to 4.7% — quite different to Orman’s 3% target.
“My 4% rule was actually based upon a worst-case situation,” he said. “An investor who retired in October of 1968 who ran into just a terrible, perfect storm of bad stock market results and very high inflation, which forces withdrawals up every year.
“Are we in a similar period beginning with this year with very high inflation and potentially low stock market returns? Entering something even worse? I don’t know, unfortunately. And we won’t know for quite a few years.”
If the contrast between Bengen and Orman proves anything, it’s that your retirement withdrawal strategy is going to vary depending on your finances, assets and lifestyle.
Everyone’s situation is different and while a percentage rule might be a good starting point for planning, you may want to tweak it to suit your situation.
If you’re unsure what retirement strategy will work best, consider working with a financial adviser who can help you navigate your specific financial needs for the future.
