4%, 5%, or 6%: What’s the Right Retirement Spending Rate?

Standard retirement rules do not work for everyone. The right withdrawal rate depends on your health, pension income, and lifestyle goals.

People often say that spending 5% a year in retirement is enough, while 4% is the safer choice and 6% allows a little more flexibility. But that long-standing rule of thumb may suit averages only. It does not account for when you retire, how much you have saved, how long you are likely to live, or the market conditions when you begin taking money out.

For that reason, the best withdrawal rate is rarely a fixed number such as 4%, 5% or 6% every year. It is more likely to be personal and adaptable.

“Your withdrawal strategy depends upon your goals, your life, your circumstances right now and, of course, how you feel,” says Greg Welborn, principal at First Financial Consulting. “Even if you’re doing something that mathematically works, if it makes you feel uncomfortable, human behavior is to abandon it.”

From just $107.88 $24.99 for Kiplinger Personal Finance

Become a smarter, better informed investor. Subscribe from just $107.88 $24.99, plus get up to 4 Special Issues

Sign up for Kiplinger’s Free Newsletters

Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.

Profit and prosper with the best of expert advice - straight to your e-mail.

When it comes to choosing a retirement withdrawal strategy, it is easy to fall into the trap of following the 4% rule without question. But doing so could leave you short of money or, on the other hand, with more than you need. A better approach is to adapt general guidelines to your own situation.

Picture your retirement

Withdrawing 4% a year, adjusted for inflation, may be the right fit for you. Or 6% may be more realistic. You will not know until you decide what kind of life you want in retirement and whether your savings can support it.

That means thinking through everything from where you will live — whether you age in place, move to a less expensive area or settle somewhere pricier — to how you will spend your time. Someone who plans to stay home, tend a garden or spend time with grandchildren may need less money than someone who wants to travel, take classes and pursue many hobbies.

“People are so focused on saving they don’t focus enough on envisioning their retirements,” says Kelli Smith, executive director of financial planning at Edelman Financial Engines. “The withdrawal rule depends on how well somebody saved relative to expectations.”

When planning, be as specific as possible. Include both essential and nonessential expenses so you can get a realistic picture of your monthly costs. Once you have that, you can decide which withdrawal strategy makes sense.

Your income and longevity matter

Retirement can last 30 years or more, depending on when you stop working, so the goal is to make your money last. That is where the 4% rule comes in, but it overlooks pensions, Social Security and other recurring income. If those sources cover much of your monthly budget, you may not need to draw as much from savings, which allows your balance to keep growing and compounding over a long retirement.

On the other hand, if your guaranteed income does not cover enough of your monthly costs, you may need a higher withdrawal rate to make up the difference. Someone who retires early or has a modest nest egg may feel more pressure on savings, while a later retirement or a larger portfolio can support more spending and greater enjoyment.

You should also think about longevity when deciding on a withdrawal rate. A family history of heart disease, cancer or other chronic illnesses may suggest a shorter lifespan, while a family history of living well into the 90s may call for a more conservative approach.

Nothing stays the same

Your withdrawal rate will likely change over the course of retirement, which makes the 4% rule less useful on its own. Bonnie Treichel, founder of Endeavor Retirement, says spending habits shift across different stages of retirement — go-go, slow-go and no-go — so the amount you withdraw will change too.

Required minimum distributions, or RMDs, are another important factor. Beginning at age 73 or 75, depending on birth year, people with a traditional 401(k) or IRA must take a mandatory annual withdrawal, which can reshape their overall plan. “People don’t spend in a straight line,” Treichel says.

Savings and lifestyle together determine the rate

Ultimately, your savings will help determine how much you can spend in retirement, but so will your lifestyle, retirement timing and health.

To find the right withdrawal rate, think about your retirement plans, your recurring income and the amount you have saved. Use 4%, 5% and 6% as guideposts to identify your own sweet spot.