If you’ve worked, saved, and invested with an eye toward retirement, you might be wondering when it’s best to start withdrawing some of your hard-earned money — and how much.
There is a lot of advice about how much you should save for retirement, but there is less information about withdrawing the money when the time comes.
Figuring out how to “spend down” your retirement savings can require a series of complicated calculations and will depend on a number of factors that are unique to you.
💰💸 Don’t miss the move: Subscribe to TheStreet’s free daily newsletter💰💸
Personal finance author Suze Orman offers advice about how to spend money during retirement.
The history of the 4% rule for retirement spending
The first question Orman wants you to ask yourself: “How much can I safely withdraw and still have a high probability that if I live well into my 90s I will still have money to support myself?”
Her goal, she says, is to have every retiree be very confident about their withdrawal plan.
More on personal finance:
Tony Robbins has blunt words on IRAs, 401(k)s and a tax factScott Galloway warns U.S. workers on Social Security, retirement flawDave Ramsey explains a Roth IRA, 401(k) blunt truth
The “4% rule” is a strategy that suggests a retiree can withdraw an amount equal to 4% of their savings each year for up to 30. years of retirement. It’s not a hard and fast rule — as there are no tax laws that say you must withdraw 4% of retirement savings every year.
According to Fidelity, the 4% rule comes from a set of historical data on stock and bond returns over a 50-year period — 1926 to 1976 — and the prevailing narrative that withdrawing 5% of a person’s retirement savings annually was a safe bet.
Related: Suze Orman delivers blunt advice on delaying Social Security benefits
But when a financial planner named William Bergen did some deeper study, he concluded that withdrawing just 4% annually would allow retirees to weather the most tumultuous economic situations.
Since every person’s situation is unique, the 4% rule is by no means absolute. You have to take into account your current and potential medical expenses. There are always market fluctuations and you must also consider your personal tax rate.
Tax rates are affected by many factors, including the types of accounts you have, how much is in them, the state you live in, what deductions you take, and any income you earn, even in “retirement.”
Suze Orman’s advice about how to plan retirement investment withdrawals
A surprisingly small number of people say they are confident about how to spend their retirement savings and investments, says Orman. Only one in four retirees is “very confident” they know how much to withdraw in retirement, she says.
She suggests asking yourself the following questions before you make any decisions:
When will you start making withdrawals? If you start using money inside your 401(k)s and IRAs at 60 or 62, your rate of withdrawal should be lower than if you start at 68 or 70.
How many years until you turn 95? If you celebrate your 65th birthday in average health, there is a good probability you will still be alive into your 90s. Orman’s recommendation is to assume you will live until at least age 95. If you are in excellent health and have a family history of long-lived parents and grandparents, her advice is to base your withdrawal strategy on wanting your money to last until you are 100.Can you cover living expenses from guaranteed income sources? If your Social Security benefit, a pension (if you have one), and perhaps an annuity completely covers your essential living costs, you may be able to afford to withdraw more of your savings.
That said, Orman cautions that if you decide to start making withdrawals in your early 60s, aim to withdraw and spend no more than 3% or so of your account value that first year, and then adjust that amount for inflation each year.
“If you don’t start withdrawals until around age 70, 4% can work just fine. And if you have all your living costs covered by guaranteed income, more than 4% may be viable,” she writes.
“Retirement is a time to enjoy yourself, not worry,” says Orman.
Related: Veteran fund manager unveils eye-popping S&P 500 forecast
