Once you’ve reached your retirement goal, you face another challenge: Figuring out how much of your savings you can safely withdraw each year without running out of money.
A guideline that has stood the test of time is the 4% rule, which was developed by William Bengen, an MIT graduate in aeronautics and astronautics who later became a certified financial planner.
How it works: In the first year of retirement, withdraw 4% from your IRAs, 401(k)s and other tax-deferred accounts, which is where most workers hold their retirement savings.
For every year after that, increase the dollar amount of your annual withdrawal by the previous year’s inflation rate. For example, if you have a $1 million nest egg, you would withdraw $40,000 the first year of retirement. If inflation that year is 2%, in the second year of retirement you would boost your withdrawal to $40,800.
This provides a handy way to calculate whether you’ve saved enough to generate the amount of income you believe you’ll need in retirement.
But a recent report by investment research firm Morningstar says retirees may want to consider a more conservative withdrawal rate of 3.3%. Under that scenario, a retiree with $1 million in savings would only be able to withdraw $33,000 in the first year of retirement.