What is the right withdrawal rate to reduce the risk of running out of money too early? The longer your retirement lasts, the more damage a small early overwithdrawal can cause. If you retire between ages 55 and 60, your savings may need to support you for 35 to 40 years or longer.
For some early retirees, a starting withdrawal rate between 3% and 3.5% may provide a more conservative planning range than 4%. Morningstar’s current research identifies 3.3% as the highest starting rate under its base-case assumptions for a 40-year retirement. However, no withdrawal rate is guaranteed or suitable for everyone.
Inflation also reduces your future buying power. Rather than assuming regular expenses will rise by 10% every year, consider adding an initial contingency buffer of approximately 10% and modelling realistic inflation for housing, utilities, groceries, transportation, personal care, and healthcare.
Remember that your portfolio may not need to fund your entire lifestyle. First, calculate your annual expenses and subtract reliable income from Social Security, pensions, or annuities. The remaining amount is your retirement-income gap.
For example, if your expenses are $80,000 and guaranteed income provides $40,000, your portfolio must initially generate the remaining $40,000, plus an appropriate healthcare or emergency buffer. At a 3.5% starting withdrawal rate, producing $40,000 would require a portfolio of approximately $1.14 million.
Pressure-test your plan against poor investment returns early in retirement, commonly called sequence-of-returns risk. Plan for at least one spouse to live longer than expected and review your withdrawal strategy every six to twelve months. Your withdrawal rate is not a one-time setting. It should adjust as your spending, income, portfolio value, and market conditions change.
The difference between withdrawing 3%, 4%, or 5% can determine whether you can retire now, need to work longer, or risk exhausting your savings too soon. Learn more from Morningstar’s current retirement-income research.
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