Retirement planning is a field that’s ever-evolving. Advice can change from decade to decade, and largely depends on a variety of factors the market dictates over time.
One of the more important pieces of financial advice many advisors put forward is their idea of what the so-called “safe” withdrawal rate for retirees is. This rate, which has tended to fluctuate over time depending on various factors including expected stock market return and the interest rate on bonds, for example, has traditionally hovered around 4%.
An interesting analysis completed by analysts at Morningstar actually suggested that the forward “safe” withdrawal rate may actually be sub-4% for 2025 onward, though some financial experts (Dave Ramsey comes to mind) have suggested that much higher withdrawal rates are not only possible, but favorable over time.
As is the case with most pieces of conventional financial wisdom, there’s some truth behind each strategy. And which path retirees ultimately choose will depend upon a number of factors, including their risk tolerance and portfolio allocation setup.
Let’s dive into the question of whether most retirees can sleep well at night with an 8% withdrawal rate from their retirement portfolio over time.
Key Points About This Article:
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The percentage of one’s retirement portfolio they pull out each year in retirement can vary, depending on a number of factors.
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A 4% withdrawal rate is generally considered to be safe by most financial experts, though some differ in their views.
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What Is the 4% Rule?
4% rule visual
The visual above really does the 4% rule justice. Introduced by financial planner William Bengen in the 1990s, this guideline is one of the most-utilized by personal finance experts to help advise retirees on how much to pull from their portfolios each year in perpetuity.
The thinking is that so long as investors pull 4% per year (with subsequent increases adjusted for inflation each year), one’s spending power and portfolio balance should have a high probability of lasting until one passes away. Now, since the market tends to provide returns of around 11% per year (the historical average over the past 100 years), there’s actually a pretty good likelihood that a retiree’s portfolio could actually grow over time with this modest withdrawal rate.
But with the goal being to have these funds last the entirety of one’s lifetime (assuming one lives another 25-30 years past retirement age at 65), and factoring in some recessions and big bumps in the road along the way, it’s better to be safe than sorry. That’s what most financial experts will likely tell you, with varying “precise” estimates of what’s truly a safe withdrawal rate varying across the sector.
What Is the 8% Rule?
Dave Ramsey
Some experts (again, the Dave Ramsey types out there) have long suggested that an 8% withdrawal rate from one’s portfolio is reasonable to allow a retiree to sustain their quality of life through retirement. In fact, Ramsey is among a few notable personal finance experts who have suggested that a withdrawal rate in the double-digits can be acceptable for many households, depending on one’s circumstances.
There are reasons for such a view. First off, for investors who may have been pulling 8% per year since 2010, for example, such a withdrawal rate would probably have left investors with a larger sum than they had initially invested. The market has actually outperformed over the past 15 years, providing above-average returns allowing retirees to benefit and pull out a greater percentage of their portfolio than in recessionary years.
Now, most personal finance experts may disagree with this approach, for a few reasons. For one, timing. If a newly-minted retiree begins taking an 8% withdrawal rate out of the gate, and the market does its thing and crashes 50% within a month or two (which has happened in the past), the math may not work very long. Rolling back the previous example to 2007, a retiree who began withdrawing 8% of their portfolio that year, and continued doing so during the GFC, would have been taking a very high percentage of their portfolio out at the worst possible time. This would have left the investor with a relatively small base (already reduced by 50%+) to grow out of this mess, and led to a likely scenario of this individual running out of money.
Additionally, it’s possible that retirees may live much longer than expected. Living to 100 is much more common today than it was a century ago, and with modern medicine, anything’s possible. Taking an 8% withdrawal rate, even off of a base that may have had a decade or so to stay relatively stable, can drain quickly if there’s a big downturn and medical expenses pick up in one’s later years.
The Verdict
A judge banging a gavel on a desk
As the debate between the traditional 4% rule and the proposed 8% rule intensifies, retirees must carefully consider their unique financial situations and market conditions.
While the 4% rule has been a reliable guideline for ensuring long-term financial security, evolving economic landscapes and extended lifespans may necessitate more flexible withdrawal strategies. The 8% rule, though enticing for potentially higher income streams, carries risks associated with greater market volatility and longevity of funds.
Ultimately, consulting with a financial advisor to tailor a retirement plan that adjusts to personal circumstances and changing market dynamics is crucial. Adapting withdrawal rates and considering alternative strategies like dynamic withdrawals or the bucket approach may offer the best path to a secure and fulfilling retirement.
