You’ve done the hard work of saving for retirement. The next challenge is deciding how to turn those savings into steady income without running out of money too soon.
According to new research from Morningstar, retirees may be able to safely withdraw 3.9% of their portfolio in the first year of retirement, then adjust that amount annually for inflation. The analysis found this approach had a 90% chance of lasting at least 30 years.
How the 3.9% rule works
The guideline assumes a diversified portfolio with roughly 30% to 50% invested in stocks, with the rest in bonds and cash.
For example, a retiree with $1 million saved would withdraw $39,000 in the first year. If inflation were 2.46%, the withdrawal would rise to about $39,959 in the second year. Each year after that, the withdrawal amount would continue to adjust based on inflation.
In most scenarios studied, retirees following this approach still had money left after 30 years.
Why taxes and fees matter
The 3.9% rule is a useful starting point, but real-world factors can significantly affect outcomes. Taxes and investment fees can reduce how much you actually get to spend.
For instance, retirees withdrawing from a Roth IRA typically keep more of their money, since qualified withdrawals are tax-free. In contrast, withdrawals from a traditional 401(k) are taxed as ordinary income, including both contributions and investment gains.
Coordinating withdrawals with Social Security
Morningstar’s analysis suggests that delaying Social Security benefits until age 70 can significantly increase lifetime spending. Retirees who combine delayed benefits with the 3.9% withdrawal strategy tend to get the most out of their savings.
For those who retire earlier, bridging the gap between full retirement age and age 70 can be challenging. Some potential strategies include:
- Building a short-term ladder of inflation-protected bonds to cover spending in the early years.
- Skipping inflation adjustments after years when the portfolio has negative returns.
- Temporarily reducing spending to about 80% of the planned retirement budget until Social Security begins.
Planning beyond the rule of thumb
No single withdrawal rate works for everyone. Health, lifestyle, market conditions, taxes, and fees all influence how long retirement savings will last.
The 3.9% rule offers a solid framework, but it works best when paired with a broader retirement plan that accounts for spending flexibility, investment costs, and the timing of Social Security benefits.
