Research on Withdrawal Rates: How Much is Right?

By Justin Pritchard, CFP®

How much can you withdraw from your savings without running out of money? It depends on when you look, and Morningstar published some updated numbers that may be surprising.

This study tells us that the withdrawal rate you can use (or the amount you need to save for retirement, if you prefer to look at it that way) depends on several factors.

Sticking to a rigid withdrawal strategy is uncommon, and I never see clients follow a strategy like this. But you can still get some valuable insight out of these studies, whether or not you actually follow the systems we’ll talk about here.
Continue reading below, or get similar information from this video.

Key Takeaways

So let’s highlight those little gems up front, and we’ll dive into the details after that.

One takeaway is that the future is probably brighter now, meaning you might expect higher long-term investment returns than you would have expected a year ago. As a result, you may be able to use a higher withdrawal rate if you’re going to retire in the near future.

That’s probably not surprising. After a downturn the expected returns would intuitively be higher. But of course, there’s no guarantee, the markets will still move up, down, and sideways, and we certainly can’t predict exactly when or how fast any returns will materialize–you can always run out of money, no matter what strategy you use.

Another key finding is that changing your withdrawals even a little bit can help. That might mean skipping an inflation adjustment or living with less when the markets go down. Ideally, it’s a temporary thing. But by taking small steps, you can hopefully avoid more drastic consequences down the road.

How Withdrawal Rates Work

We’ll talk more about the details above, but as a refresher, a withdrawal rate is supposed to help you estimate a sustainable annual income that can last for your lifetime.

The challenge for retirement planning is spending enough to enjoy yourself and meet your needs—while balancing the need for your money to last as long as you live.

For many people thinking of retirement, those withdrawals need to last 30 years or so. Sometimes longer, if you retire early.

Withdrawal rates can also help you figure out how much you might want to build up before you retire.

So, you can either back into a calculation, or we can use the traditional 4% rule, which makes the numbers easy.

  • Multiply by 25: One solution is to multiply the amount you want to withdraw each year by 25, giving you a target amount to have saved at retirement. If you wanted $50,000 per year, you’d multiply that by 25, providing a retirement goal of $1.25 million.
  • Back into a calculation: You can also take the amount you want to withdraw each year and divide it by your desired withdrawal rate. For example, divide $50,000 by .03 (a 3% withdrawal rate) to arrive at $1.67 million.

Pitfalls of Using Withdrawal Rates

The latest research from Morningstar says the safe withdrawal rate rose a bit from last year, given the current economic and market conditions.

So let’s review the various rates they mention, what they mean, and why they’re different.

It’s interesting how rates change over time, but the fact is that these things always change. That’s why they’re best viewed as rough rules of thumb, and we probably don’t want to rely on rules of thumb when making important decisions.

More robust and detailed planning is a better solution, but still, it can be helpful to make some ballpark estimates sometimes.

In reality, I don’t use withdrawal rates with clients, and I don’t think anybody follows a rigid withdrawal rate strategy, at least not that I’m aware of.

For most people, retirement spending is kind of lumpy and unpredictable. You need a new car, you have a health care event, something else comes up, etc.

Plus, the data suggests that retirees don’t necessarily need to spend at a rate that matches inflation perfectly, which we’ll discuss more later.

Instead of using a withdrawal rate, I prefer to look at the big picture with more moving parts. For instance:

  • Estimates on market growth
  • Specific cash flows needed throughout retirement
  • Inflation
  • Taxes and certain strategies you might use to manage your taxes
  • Healthcare surprises that might come up

Those things don’t necessarily fit with a simple, single withdrawal rate.

For example, let’s say you’re doing a Social Security bridge strategy.

With that approach, you delay claiming Social Security instead of taking it immediately when you stop working. That might make sense if you retire in your early 60s because your Social Security benefit grows a little bit for each month you wait.

Potential benefits of the strategy include:

  • More inflation-adjusted, tax-favored, and government-guaranteed income later in life
  • A bigger survivor benefit for a surviving spouse
  • Spending down pre-tax savings to hopefully reduce your taxable income later in life
  • Taking income while you have a relatively low income (hopefully in low tax brackets)

As a result, your RMDs in your 70s should shrink, which can potentially help you stay in lower tax brackets later in life. This might also reduce the chances that you have to pay higher Medicare premiums in retirement, which can rise if you have a high income.

But to make the bridge strategy work, you need to spend assets instead of taking income.

So, you need sufficient assets, and you would want to evaluate the strategy carefully, making sure it makes sense. You might withdraw from your assets at a high rate in the early years of retirement, and then drop to a much lower rate once you begin taking SS benefits.

Again, that doesn’t fit with a single withdrawal rate.

More From the Study

Morningstar’s research assumes:

  • A portfolio composed of 50% stocks and 50% bonds
  • A desire for the money to last for at least 30 years
  • A 90% probability of success using Monte Carlo analysis

Importantly, the withdrawals are inflation-adjusted in most cases. So, the amount you withdraw typically increases each year to keep your purchasing power over time. That’s important for most people because even small amounts of inflation can erode your purchasing power over several decades.

What changed in the latest version of the study? They assumed higher stock and bond returns going forward than they used in last year’s study. Inflation was also higher, which is encouraging to know. Of course, these are all assumptions, and they’ll ultimately turn out to be wrong, but researchers used their best guesses to figure out how things might unfold in the coming decades. There’s no guarantee, though, so you’d use these—or any—assumptions at your own risk.

For a traditional inflation-adjusted withdrawal rate, the study landed on 3.8%. And they also noted you could potentially have as little as 30% in stock—instead of 50%—and start with that same rate. That might be comforting for more conservative investors. But again, these are all just assumptions and projections, and only time will tell what the markets and your investments do.

The way a traditional withdrawal rate (like the so-called 4% rule) works is to take your starting balance and multiply it by the withdrawal rate. That gives you a withdrawal amount for your first year, and then you increase the amount in each subsequent year to keep up with inflation.

Using round numbers, say you have $1 million saved for retirement. Assuming a 3.8% withdrawal rate, that could produce $38,000 of withdrawals in your first year. Then, if inflation was 4% over the year, you’d add 4% for the following year. In that case, $38,000 times 104% is $39,520. And you keep repeating.

With that approach, you always keep up with inflation. But that can put some hefty demands on your portfolio, so it’s worth looking at ways to improve your chances of success.

Tweaks and Dynamic Withdrawal Strategies

If you’re willing to be flexible, you might be able to take more income. Of course, there are pros and cons of doing so.

For example, you might be willing to go with a probability of success lower than 90%, which would probably allow you to withdraw more each year.

Or, maybe you have no desire to leave assets to heirs. Any withdrawal strategy could lead to spending down your assets. But you’ll see that in some cases, these strategies leave you with more money than you started with after 30 years. Of course, it’s not necessarily worth as much by that point, but there could be a cushion in the cases where things go favorably (which doesn’t always happen).

If you end up with twice as much money as you started with, that could mean that you ended up missing out on some fulfilling life experiences. Maybe you could have taken more vacations or given more money away. At the same time, it’s certainly very reasonable to set money aside for unknowns. Health care, and LTC in particular, can get very expensive. So, that cushion could come in handy.

What might make it possible to withdraw at a rate higher than 3.8%, at least according to this study?

The researchers highlighted dynamic strategies as potential solutions.

You can see the Fixed Real approach, which is a standard withdrawal rate like the 4% rule—or the baseline. The term “real,” by the way, means after inflation. So you receive a fixed amount of inflation-adjusted withdrawals each year.

You need to be okay with unpredictability if you use those methods. Uncertainty can be uncomfortable, but it is reality, so it’s nothing new to you if you’re old enough to be planning for retirement.

Forgo Inflation

Let’s start with forgoing inflation adjustments. In that case, you’d skip your inflation adjustment in years following a loss in your portfolio. That way, you withdraw less, and that reduced withdrawal ripples out over all of the subsequent years. A small pause can really be helpful.


Next, you have guardrails. With that system, you give yourself a raise when your investments are doing well, and you reduce withdrawals when markets go down. Either way, there are rules and limits on how much those withdrawals will increase or decrease.

This allows you to start with a higher rate, and if all goes well, that’s great. But you need to be prepared for the possibility of market downturns and cutting spending in the future.

Required Minimum Distribution (RMD)

There’s also the RMD method. To use it, you withdraw based on your life expectancy. You can find those numbers from life expectancy tables online. So, when you’re younger and you have more years to live (hopefully), you withdraw at a lower rate. As you grow older, you can withdraw at higher rates. This will result in spending down most of your assets by the time you reach life expectancy.

10% Reduction

You also have the 10% reduction. With that option, you start with a traditional withdrawal system. But you reduce your spending by 10% whenever your investments lose money during a calendar year. After your portfolio has a positive year, you get back on track. But it’s not entirely clear if that means you go back to where you would have been without the market losses, or if you resume inflation adjustments based on the reduced withdrawal amount.

Smile (or Haircut)

Finally, there is the retirement spending smile, which they call the haircut here. This is based on research about how retirees actually spend their money, and they don’t always follow inflation exactly. It turns out that many people spend at roughly inflation minus 1%, so that’s what they modeled here. I’ve got other content that covers this, and it can take a lot of pressure off of a retirement portfolio if you assume this 1% inflation reduction.

There’s a lot more to consider here. As just one example, remember that these withdrawal rate strategies don’t necessarily take taxes into consideration, and taxes are a reality. You won’t necessarily get to spend every dollar you take out, so some extra care is required when you make your goals and run projections.