Spending in retirement refers to the withdrawal rate you choose from your savings. Taking too much can deplete your savings too fast. You can time your withdrawals to get the most of your retirement income—no matter what the initial value. Ideally, your withdrawal rate should provide a steady source of income for 20 to 30 years—more if you’re retiring early. You’ll want to be sure your money lasts long enough to cover your expenses now and later, so you should adjust your expected withdrawal rate to plan for steady income throughout your retirement.
The lower the withdrawal rate, the more likely your money is to last through retirement. The “4% rule” was developed by William Bengen in 1993. He found that an individual could have withdrawn 4% of their retirement-date assets, with spending adjusted each year for inflation, over a 30-year retirement period using a portfolio invested in 50% to 75% stocks. The Trinity Study from 1998 updated this approach for a variety of scenarios and confirmed that a 4% withdrawal rate based on 20th century U.S. portfolio returns would have allowed a retiree to withdraw the same real income each year with only a small chance of failure.
The problem? Using historical U.S. asset return data is that future market performance (and retirement outcomes) will depend on the price of stocks and bonds now. Bengen calculated his 4% rule in the mid-1990s, when a portfolio could be expected to return about 8%. Today, the picture is different; portfolio returns are lower and stocks are higher priced (which correlates to below-average future performance).*
Instead of withdrawing a certain percentage (like the 4% rule) for the duration of your retirement, you should consider your spending plans throughout retirement. What will you spend your money on and when? Can you withdraw more money during some periods of time and less at other times? A holistic retirement income approach can help you determine how and when to withdraw your retirement assets.
*New York Times, New Math for Retirees and the 4% Withdrawal Rule.
The opinions expressed are those of our investment professionals, and are no guarantee of the future performance of any American Century Investments® portfolio. This information is not intended to serve as investment advice; it is for educational purposes only.