Three million dollars sounds like the kind of money that lets you spend retirement sitting on the dock of your own boat, sipping mai tais (or coffee, if that’s more of your thing). But a $3 million retirement fund must be managed with the same care and consideration that you’d apply to a much smaller account.
A key part of managing your retirement savings is knowing how much you should withdraw every year. You have several options about how you’ll make your withdrawals, but determining the right one for you requires some expert insight. This is why you should consult with a certified financial planner or other advisor when digging into the specifics of your retirement plans.
The 4% rule is an old chestnut of wisdom within the personal finance community. As Ohan Kayikchyan PhD, CFP, founder of Ohan The Money Doctor, explained, it’s a form of general guidance about how much money you can withdraw each year during retirement to avoid depleting your money.
“As the name suggests, you should withdraw 4% of total retirement savings the year you retire, adjusting the withdrawal amount annually to account for inflation,” he said.
He added that, according to this rule, the amount you withdraw should be considered safe enough to sustain your retirement for 30 years.
“For example, if you retire with $3 million saved, you would start withdrawing $120,000 in the first year and adjust this amount for inflation thereafter,” he said.
To stretch your money further, Kayikchyan said you can consider withdrawing less than $120,000 annually.
“The reverse calculation is also helpful, as the same 4% rule is used to determine how much money you need to retire. Simply divide your desired annual retirement income by 4%.”
Kayikchyan noted that the 4% rule originated in the mid-’90s, using historical stock and bond returns data over 50 years.
“The hypothetical portfolio used for the rule was invested 50% in stocks and 50% in bonds,” he said. “In reality, your actual portfolio’s asset allocation may differ, and the length of your retirement may vary, not necessarily lasting 30 years.”
As he explained it, in a high inflationary environment, “utilizing the 4% rule as a retirement withdrawal technique may not be very sound.”
Elizabeth Pennington, CFP, senior associate at Fearless Finance, said that the 4% rule is often misunderstood. While you can take 4% out of your starting retirement balance, you shouldn’t forget that you also have to pay taxes on any money that isn’t in a Roth account. She added that you should not take 4% out of your current retirement balance every year but adjust the original 4% for inflation.
“If one person with $3 million in retirement retires into a high-inflation/low-growth market, how much they can safely spend is going to be a lot different than someone that retires into a rising market with low inflation,” she said. “Market context matters, and that’s where it’s worth consulting with a financial planner rather than relying solely on a rule of thumb.”
According to Taylor Kovar, CFP, the founder and CEO of 11 Financial and the CEO of The Money Couple, there are a myriad of factors that can play into your decision-making around how much to take out every year.
“Factors such as life expectancy, desired lifestyle in retirement, expected investment returns, and other sources of income (such as Social Security or pensions) should be taken into consideration when determining withdrawal rates,” he said.
Kovar added that since the goal of retirement withdrawals is to ensure the sustainability of retirement savings long term, retirees should try for a balance between “their desired lifestyle in retirement and preserving their nest egg to support future needs and unexpected expenses.”
As Anthony DeLuca, CFP, CDFA and expert contributor at Annuity.org explained it, the wiser question isn’t so much how much money you can withdraw, but how much you should withdraw.
“The first step in understanding this is to build a detailed expense sheet. Understanding your needs and wants will lay the foundation and answer everything else,” he said.
When considering what to withdraw, DeLuca also said that you should think about the investment vehicle your nest egg is in.
“If the assets are in a tax-deferred shell, then each withdrawal will be taxed at your income bracket,” he said.
While you may think that having $3 million tucked away for retirement might insulate you from worries about taxation, DeLuca said you should be cautious about withdrawing too much money in one year and causing a jump in your tax bracket.
“Secondly, if your nest egg is in an individual account, make sure that any investment sold is for a long-term capital gain, if possible. That is, investments held for more than one year,” he said. “These types of capital gains are more advantageous than short-term capital gains, which are taxed at one’s marginal tax bracket.”
Ultimately, there’s no one perfect, one-size-fits-all dollar amount or percentage to withdraw for every single retiree.
“Retirement income planning should be a dynamic, ongoing process,” said Chris Urban, CFP, RICP, founder at Discovery Wealth Planning.
While there are ways to model the probability of certain outcomes, Urban suggested that a better way to approach retirement income planning is to use a “guardrails approach that allows you to adjust your spending capacity (aka how much you can spend in dollars) depending on factors such as age, income, investable assets, current economic environment, and legacy goals.”
Given the intricacies of determining how much you should withdraw from any amount of retirement savings — especially an amount as large as $3 million — you should seriously consider bringing in trusted financial advisors to help you. Above all, you should be flexible.
“Whether you are managing your finances on your own or with a qualified financial professional, it is important to revisit this several times per year,” Urban said.
