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How Much Can I Use from Assets for Retirement?

Many people do not understand how much that they can safely withdraw each year from their retirement assets.  Most would assume that they can at least take out the interest (investment return) that they receive on their assets (for example 6%).  Using the interest can be done, but it is not wise move.  If one receives 6% interest annually on a $1 million investment, then this strategy says that they can receive $60,000 each year.  However, the $60,000 that they would be receiving in year 20 is only worth $33,220 compared to the $60,000 they received at the beginning of their retirement (assuming 3% inflation).  In other words, under this approach, the retirees buying power has decreased by 43% (assuming 3% inflation) after the 20th year due to inflation, as shown below. 

Buying Power
Year 1
Year 5
Year 10
Year 20

The current financial advise is that the safer withdrawal rate for a retiree age 65 is closer to 4% (some advisors would even suggest a 3.5% rate).  In this scenario, the amount withdrawn each year is increased with inflation. Thus, the 4% withdrawal amount on $1 million in assets would be $40,000 in the first year and increasing by inflation each year after that (so $41,200 in year 2 and increasing to $72,250 in year 20, assuming 3.0% inflation).  This way, a retiree's buying power is projected to be maintained through retirement.  In using this approach, there is a high likelihood that the retirement funds will outlast the retiree.  In addition, there could be a significant inheritance left.  This is because, the 4 percent withdrawal assumes that under most situations that there will be enough funds for the retirees life, including if the retiree lives past his normal life expectancy or if there is a downturn in the investment markets during his retirement.  Thus, if he lives out his normal life expectancy and investment markets have average performance, there will still be a sizable nest egg. 

Unfortunately, many retirement websites still convert the assets at retirement into an annuity assuming approximately 6% withdrawal rate.  These websites assume more in a retirement annuity than the 4% withdrawal rate, without warning about the security of using this approach.

Why is there such a difference between the rates? 

Retirement risks accounts for most of the differences.  Mainly, the 6% withdrawal rate uses an average retirement scenario for a single retiree.  In an average retirement, 50% or more of retirees may outlive their assets using this approach, while the other retirees will need to significantly cut back later in retirement due to depleted assets.  With the 4% withdrawal rate, the chance of outliving ones assets is much lower (less than 10%).  The risks that create the differences in the two rates are:

  • Length of retirement assumption - Retirement calculators assume the average lifetime for a 65 year old is approximately 20 years (the average life expectancy).  When the 4% withdrawal rate is calculated, it assumes a 30+ year retirement because 10% of age 65 retirees will live to age 95 or longer. 
  • Rate of return on assets - Most retirement calculators use a single rate of return on assets.  The 4% withdrawal rate reflects that asset returns will not always meet our expectations. Thus, the 4% withdrawal rate predicts some economic downturn to place more emphasis on safety and conservatism.
  • Single versus Married - Many retirement calculators assume a payout while the retiree is alive (e.g., 20 years).  If you are married, you will want the money paid out while both you and your spouse are alive.  And, for a married couple age 65, there is an 18% chance that one of them could live an additional 30 years.  Do you really want the money to run out after 20 years?

As you can see, there is a lot of variability that goes into planning to make sure your retirement nest egg will last.  And, the 4 percent withdrawal rate factors in this variability.  In other words, the 4 percent withdrawal rate will assume your nest egg will typically outlast your life because you do not want to be caught short and outlive your nest egg.

However the 4 percent assumption is also dependent on your asset allocation.   You determine a more exact withdrawal rate by checking out a retirement calculator from T. Rowe Price.  It shows the probability that your nest egg will last based on a specific annuity withdrawal rate for a specific number of years.

For example, using T. Rowe Price calculator, a retirement fund for a 65 year old under a 40% stock, 40% bond, 20% cash portfolio, has the following chance that there is enough assets to last.

50% Chance
90% Chance
99% Chance
20 Years
30 Years
40 Years


Many financial analysts focus on the 30 year results (to age 95 assuming an age 65 retirement age), and thus are more commonly suggesting a 3.5% to 4.0% withdrawal rate.  Note, with a 4.1% withdrawal rate, there is an approximately 10% chance that there would be no assets remaining after 30 years. 

The 30 year scenario is used because an age 65 has the following probability to live:

Married Couple*
20 Years
30 Years
40 Years

* At least, one person survives

Annuity vs. 3.5% to 4% Withdrawal Rate

In addition to the 3.5% to 4% withdrawal strategy there are two other scenarios that you may want to consider.  The 3.5% to 4% withdrawal strategy is designed to have a high likelihood of success for not outliving your assets.  As an alternative strategy, you can choose a higher withdrawal rate.  For example, a 5% withdrawal rate may last you 25 years which may be a acceptable risk because there is only a 25% chance of a 65 year old of a single retiree living past the age of 90 (but a 45% of one spouse living past 90).  Yet, having a higher withdrawal rate increase the chances of you outliving your retirement assets, especially if you live longer than expected. 

Some advisors suggest using a higher withdraw rate early in retirement and then decrease it later.  This is because you do more early in retirement like traveling.  However, this may not be a safe strategy either in that you may have higher expenses later in retirement due to health care, gifts to grandchildren and great grandchildren and assisted living costs (if you choose to self-finance long-term care).  In my mind, the expenses early in retirement and later in retirement can be close to a wash depending on your lifestyle.  Yet, to look at your individual needs, you should do a more precise budget calculation of your expenses.

The other strategy is to buy an fixed annuity with inflation protection.   Per Vanguard annuity calculator (in July 2005 assuming $900,000 investment), a married couple age 65 can get an annuity that is equivalent to a 4.3% withdrawal rate while a single retiree age 65 can get an annuity equivalent to a 5.5% withdrawal rate. This may not sound that much better, but it may be a safer alternative because the fixed annuity will be paid as long as you live whether it is 20 years or 40 years (as long as the insurance company does file for bankruptcy).  Because an insurance company can spread the mortality risk amongst a large group, they can provide a higher annuity to the retiree than a retiree can do using the 3.5% to 4.0% withdrawal rate.  This is because the 3.5% to 4.0% withdrawal rate needs to assume that the retiree will live a much longer life on average while an insurance company can assume that a specific retiree will live a normal life expectancy.  So your options of how much to withdrawal as annuity a year is:

3.5% to 4.5% Withdrawal

Designed to have a lower chance of outliving your assets

High likelihood of a significant inheritance for your children or charity

Limited income
5.0%+ Withdrawal Higher income

Greater chance of outliving your assets

Need to cut back on expenses in case of economic slowdown (when investments fall in price)


Can get a slightly higher withdrawal

Reduces the risk of outliving your assets (if you live a long life)

Insurance companies will not pass on an inheritance to your children.

Part of payment goes to pay agent's commission and for insurance company's profit and administration costs instead of to your retirement

There is no exact science to which option is better.  It is based on your risk tolerance and the amount of your assets at retirement.  If you have excess funds, you can more easily self-insure your retirement to leave a larger inheritance to your children.  Another option is to split your asset so that an annuity covers the basic living expenses while the rest of your assets covers your non-basic living expenses (vacations, gifts, eating out fund, etc.).

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