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The 4% rule

A popular rule of thumb says you can safely withdraw 4% of your retirement savings annually without running out of money over a 30-year retirement.

If you have a $1.5 million nest egg, the 4% rule means you can withdraw $60,000 the first year and then just adjust that amount for inflation in the following years. To manage your monthly budget, you divide this annual amount by 12, which would be $5,000 in the first year. This strategy helps ensure that your retirement funds last, providing a steady income while taking into account market fluctuations and life expectancy.

It’s important to note that while the rule is a good starting point, it’s also based on historical data and assumes a balanced portfolio of stocks and bonds. It doesn’t account for future market volatility or changes to your lifestyle and health. Financial expert Suze Orman called the rule “dangerous” and urged retirees to take the least amount possible from their retirement savings.

Morningstar’s annual study says the highest safe withdrawal percentage — assuming a balanced portfolio, fixed real withdrawals over a 30-year retirement, and a 90% probability of success — is 4%.

It adds that retirees can enjoy even higher starting withdrawals, “assuming they’re willing to accept other trade-offs, such as fluctuating year-to-year real cash flows and the possibility of fewer leftover assets at the end of a 30-year period.” You can consider a higher withdrawal rate if your portfolio allocation is more aggressive, but this is a riskier strategy.

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Detailed Spending Plan

It’s time to consider your spending, breaking those expenses into three primary buckets. Fixed expenses would include housing, utilities, healthcare, insurance, and groceries should be prioritized in your budget. Discretionary spending, like travel, hobbies, dining out, and entertainment, can be adjusted based on your financial situation. The third bucket is healthcare and this spending can increase as you age. Consider long-term care insurance or setting aside additional funds to cover these costs.

Cost-saving strategies

Regardless of how much you plan to draw from your retirement accounts, it’s good to look for potential ways to either save more or bring in extra income to build a cushion.

Consider moving to a smaller home or a lower-cost area to reduce housing expenses, and strategize withdrawals from different accounts to minimize tax liability. For instance, withdrawing from taxable accounts (i.e. 401(k)) first will allow tax-advantaged accounts (Roth IRA) to grow.

And if possible, delay claiming Social Security benefits until age 70 to maximize your monthly benefit.

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Chris Clark Freelance Contributor

Chris Clark is freelance contributor with MoneyWise, based in Kansas City, Mo. He has written for numerous publications and spent 18 years as a reporter and editor with The Associated Press.

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