When we talk to our clients and others in the community about their retirement goals and plans, they often ask, “How much money will I need to accumulate before I retire in order to be able to live the lifestyle I’d like?” While this is an important question, more specifically what they’d really like to know is how much they can spend each year, and whether or not that will be enough.

We won’t address the latter question today, since it depends on each individual’s goals. But we can provide you an indication of how much you can expect to withdraw safely over a 30-year retirement (age 65 through 95) without running out of money.

Bill Bengen did the first research on this topic in 1994. He looked at data going back to the 1930s and determined that for any 30-year period since that time you could have retired and withdrawn 4% of your first year’s portfolio balance each year, adjusted for inflation, without running out of money. For example, if you retired in 1932 with $500,000, you could have withdrawn $20,000 in 1932, $20,000 (adjusted for inflation) in 1933, $20,000 (adjusted for inflation) in 1934, etc. for the next 30 years. Bengen found this to be true during periods of high inflation – such as during the 1980s – as well as during periods of severe market contractions such as during the 1930s. It’s important to note that Bengen’s safe withdrawal rate is pre-tax and is not adjusted for fees and expenses. That means that taxes and fees would have to be paid out of the amount withdrawn each year, reducing the amount of money available for other retirement goals. The rate is also dependent on the mix of stocks and bonds in the portfolio.

Jon Guyton and Bill Klinger came up with the concept of guardrails in a series of studies beginning in 2006. They determined that a retiree could start with a safe withdrawal rate as high as 5.5% as long as he or she would be willing to make adjustments to future withdrawals based on portfolio performance (hence the term guardrail).

Recent research by Michael Kitces extended Bergen’s analysis as far back as 1871 and confirmed that the 4% safe withdrawal rate still held. Even more interesting, he determined that the timing of one’s retirement plays a big part in what the initial withdrawal rate could be. If one retires during a period when the 10-year trailing P/E ratio of S&P 500 stocks is high (that is, when stocks had been priced relatively high on average over the previous ten years), the safe withdrawal rate will be close to 4%. But if one were fortunate enough to retire at a time when stocks had been priced low over the previous 10 years, a safe withdrawal rate would be as high as 5.7% (even without considering guardrails).

Although not definitive, the 4% withdrawal rate is a number you should be able to utilize if you are doing your own retirement planning and want to get a sense of how big your retirement portfolio needs to be when you retire. And if you are especially worried about stock market volatility, there are other financial products you can utilize to mitigate some of the risk. But that’s a topic for another discussion…