How to Develop a Safe Withdrawal Rate in Retirement

How to Develop a Safe Withdrawal Rate in Retirement thumbnail
Potential retirees need to plan their finances to cover current lifestyle and expenses for decades to come.

On Jan. 1, 2011, 10,000 baby boomers celebrated their 65th birthday. Ten thousand more will celebrate it every day for the next 19 years; by 2030 the entire boomer generation will be senior citizens. Adjusting from wage earner to retiree generates a range of financial issues. Individuals must figure out how much money can be withdrawn from savings yearly without eventually running out of money.


  1. Estimating a Retirement Withdrawal Rate

    • 1

      Create a budget estimating how much money will be needed to cover retirement living. Include recurring expenses such as utilities, taxes, gas and other transportation costs, medical expenses, insurance payments and mortgage or rent. Do not forget to take account of groceries, household supplies, clothing, entertainment, gifts, holiday and vacation expenses.

    • 2

      List all sources of retirement income. The Social Security Administration sends future recipients a yearly document estimating potential payments. Add up income from all sources such as pensions, annuities, rental income and Social Security for a total income amount.

    • 3

      Subtract retirement income from the budget estimation. The result is what will have to be withdrawn from savings to cover expenses.

    • 4

      Compute the total of all personal savings, investment and retirement accounts. Include taxable savings accounts, brokerage accounts, IRAs, 401(k)s and other qualified retirement plans and any other savings and investments.

    • 5

      Compute the percentage of funds to be withdrawn from savings to cover expenses. Divide the unfunded expense amount by total savings, then multiply by 100 to express the result as a percentage. The formula is: unfunded expense/total personal savings times 100 equals the withdrawal percentage. A large percentage means expenses need to be pared and steps taken to downsize lifestyle; otherwise the money will run out. Financial planners generally recommend about four percent of savings be withdrawn initially.

    • 6

      Reevaluate withdrawal rates when there are changes in your life situation, the value of your accounts and tax laws.

Tips & Warnings

  • Do not forget future major purchases such as a car, house repairs and upgrades. Figure yearly withdrawals allowing a buffer ensuring enough funds for future occasional and singular expenses.

  • Inflation is a fact of life. The same amount of money withdrawn in the first year of retirement buys a lot less years later. It is a good idea to plan to raise withdrawal amounts slightly each year.

  • Use free retirement planning calculators offered on many investment company and financial websites.

  • It is wise to assume a life span of 100 years; no one wants to run out of money.

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