The Risk of Running Out of Money
Retirement withdrawal strategy determines whether your savings last 30+ years or run dry in 15. Unlike the accumulation phase where time heals mistakes, the decumulation phase is unforgiving—poor decisions compound negatively.
The Failure State
This calculator helps you model sustainable withdrawal rates, understand the impact of market volatility on your portfolio, and create a strategy that balances current lifestyle with long-term security.
Understanding Your Withdrawal Rate
Your withdrawal rate is the percentage of your portfolio you take each year. This simple number has profound implications for portfolio longevity.
The 4% Rule Origins
Sensitivity Analysis: Withdrawal Rate Impact
Starting with a $1 million portfolio at different withdrawal rates:
| Initial Rate | Year 1 Withdrawal | Historical 30-Year Success | Risk Assessment |
|---|---|---|---|
| 3% | $30,000 | ~99% | Very conservative |
| 4% | $40,000 | ~95% | Traditional safe rate |
| 5% | $50,000 | ~80% | Moderate risk |
| 6% | $60,000 | ~45% | High risk |
| 7% | $70,000 | ~25% | Very high risk |
Based on historical simulations with 60/40 stock/bond portfolio
Notice the dramatic cliff: moving from 4% to 6% cuts 30-year success from 95% to 45%. The difference is just $20,000/year initially—but in year 30, it's the difference between financial comfort and destitution.
The Sequence of Returns Risk
Two portfolios with identical average returns can have vastly different outcomes depending on when returns occur:
| Scenario | Average Return | Year 1 Return | Year 30 Balance |
|---|---|---|---|
| Good sequence | 7% | +25% | $2.1 million |
| Bad sequence | 7% | -25% | $450,000 |
Same average return, opposite outcomes—sequence matters
Early Losses Are Devastating
The Mathematics of Sustainable Withdrawals
The sustainable withdrawal rate depends on portfolio return, inflation, and time horizon. The simplified model:
Withdrawal Sustainability Formula
At 4% withdrawal and 3% inflation, your portfolio needs approximately 7% nominal returns just to maintain balance. Returns above this allow growth; below this, the portfolio depletes.
Dynamic Withdrawal Strategies
Rigid 4% withdrawals can be suboptimal. Modern approaches include:
| Strategy | How It Works | Pros/Cons |
|---|---|---|
| Fixed Percentage | Always 4% of current balance | Adjusts to market; income volatile |
| Floor-Ceiling | 4% base, reduce if portfolio drops 20%+ | Protects portfolio; requires flexibility |
| Guardrails | Raise/lower rate based on portfolio performance | Sophisticated; requires monitoring |
| Bucket Strategy | 3-5 years cash, then bonds, then stocks | Psychological comfort; less efficient |
Tax-Efficient Withdrawal Order
The sequence of which accounts you tap affects taxes and portfolio longevity. General guidance:
- Taxable accounts first (allows tax-advantaged accounts to keep growing)
- Traditional IRA/401(k) next (taxed as ordinary income)
- Roth IRA last (tax-free growth continues longest)
- Consider Roth conversions in low-income years before RMDs begin
- Coordinate with Social Security timing for optimal tax brackets
Roth Conversion Opportunity
Managing Required Minimum Distributions
Per IRS RMD rules, you must begin withdrawals from Traditional retirement accounts at age 73 (75 starting in 2033).
| Age | Distribution Period | RMD % of Balance |
|---|---|---|
| 73 | 26.5 years | 3.77% |
| 75 | 24.6 years | 4.07% |
| 80 | 20.2 years | 4.95% |
| 85 | 16.0 years | 6.25% |
| 90 | 12.2 years | 8.20% |
Approximate RMD percentages by age (Uniform Lifetime Table)
RMD Penalties
Social Security Optimization
Social Security timing is one of the most impactful retirement decisions. Benefits vary dramatically based on claiming age:
| Claiming Age | % of Full Benefit | Monthly (if FRA = $2,000) |
|---|---|---|
| 62 | 70% | $1,400 |
| 65 | 86.7% | $1,734 |
| 67 (FRA) | 100% | $2,000 |
| 70 | 124% | $2,480 |
Benefits relative to claiming at Full Retirement Age (67)
Longevity Insurance
Frequently Asked Questions
Q: What is the 4% rule?
A: The 4% rule suggests withdrawing 4% of your portfolio in year one of retirement, then adjusting for inflation annually. Based on historical analysis, this approach has historically sustained portfolios for 30 years with high probability. However, it's a guideline, not a guarantee.
Q: What is sequence of returns risk?
A: Sequence risk is the danger that poor market returns early in retirement—when combined with withdrawals—permanently damage your portfolio. A 30% drop in year one while withdrawing 4% is far more damaging than the same drop in year 20. This is why early retirement years are most vulnerable.
Q: Should I take Social Security early or late?
A: Delaying Social Security from 62 to 70 increases benefits by approximately 77%. If you have other income sources and good health/longevity expectations, delaying often makes sense. Break-even typically occurs around age 80-82. Consider it longevity insurance.
Q: What is a Required Minimum Distribution (RMD)?
A: Starting at age 73 (per SECURE 2.0), you must withdraw minimum amounts from Traditional IRAs and 401(k)s annually. RMDs are calculated by dividing your account balance by an IRS life expectancy factor. Failure to take RMDs results in a 25% penalty on the amount not withdrawn.
Q: Which accounts should I withdraw from first?
A: Generally: taxable accounts first (allows tax-advantaged accounts to grow longer), then Traditional accounts, then Roth accounts last. However, strategic Roth conversions in low-income years before RMDs begin can optimize lifetime taxes. Consider a tax advisor for sequencing.
Q: How does inflation affect retirement withdrawals?
A: If you need $50,000 today and inflation averages 3%, you'll need $67,000 in 10 years and $90,000 in 20 years for the same purchasing power. Failing to increase withdrawals for inflation means declining living standards; increasing too fast depletes the portfolio. Balance is critical.
Q: What if I retire early (before 59½)?
A: Early withdrawals from retirement accounts typically incur a 10% penalty plus income tax. Strategies to avoid this include: Rule of 55 (401k access if leaving job at 55+), SEPP/72(t) distributions (substantially equal periodic payments), Roth contribution withdrawals (tax and penalty-free), or building taxable bridge accounts.
Q: Should I annuitize part of my portfolio?
A: Annuities provide guaranteed income but sacrifice flexibility. Consider annuitizing enough to cover essential expenses (with Social Security) while keeping remaining assets invested for growth and discretionary spending. Immediate annuities work best; avoid complex variable products with high fees.
Retirement withdrawal strategies depend heavily on individual circumstances including portfolio composition, tax situation, health, Social Security benefits, and spending needs. Historical success rates do not guarantee future results. This content is for educational purposes only and does not constitute financial, tax, or legal advice. Consult a qualified financial advisor and tax professional for personalized guidance.