What’s a Safe Withdrawal Rate After You’ve Already Retired?

Ever since Bill Bengen published his landmark paper, Determining Withdrawal Rates Using Historical Data, in 1994, 30 years has been the default time horizon used in most research on retirement planning. Most research assumes a starting retirement age of 65. The majority of retirees won’t live beyond age 95, making this assumption both reasonable and conservative.

But what about people who are already in retirement or who are planning for a shorter retirement duration? In this article, I’ll discuss what a reasonable withdrawal rate looks like for retirees planning for a time horizon of 10, 15, 20, or 25 years. I’ll also cover some practical tips for adjusting spending if you find that your withdrawal rate is above or below these targets.

How Time Horizon Affects Withdrawal Rates

In Morningstar’s annual State of Retirement Income study, we estimate starting safe withdrawal rates for retirees seeking a consistent level of inflation-adjusted spending from year to year and who want a plan safe enough to offer a 90% probability of success (defined as not running out of assets before the end of the period). We use forward-looking asset-class return and inflation assumptions and then use Monte Carlo simulations to test 1,000 potential return paths to vary the sequence of returns over time.

In addition to the standard 30-year time span, we also estimated withdrawal rates for shorter (and longer) time horizons. In a nutshell, a shorter planning period means you can safely withdraw more in percentage terms. With fewer years left, the portfolio doesn’t need to cover as much remaining spending, and there are fewer opportunities for below-average returns to derail the plan.

For an individual planning for a 30-year period, we estimated that retirees could start with a withdrawal rate of 3.9% of the portfolio value. As each year passes, the retiree adjusts the previous year’s spending (in dollars) to account for inflation. However, retirees who expect to spend over a shorter period can safely withdraw significantly more.

A retiree planning for 25 more years in retirement could use a starting safe withdrawal rate of 4.4%, while someone planning for just 10 more years could withdraw 9.7%. Not coincidentally, these numbers are roughly in line with what withdrawal percentages look like for retirees making required minimum distributions from tax-deferred accounts such as an IRA or 401(k). (Christine Benz has written about this.)

Adding Asset Allocation to the Mix

The numbers above assume a portfolio made up of 40% stocks, with the remainder in fixed-income securities. Portfolios with more of an equity tilt generally had lower starting safe withdrawal rates over the various time horizons we tested. That’s the result of two main factors. First, our withdrawal-rate model is inherently conservative because it requires such a high probability of success. In addition, our model is based on expectations for somewhat lower equity returns going forward. This also tilts the model toward safer investments that have a smaller range of returns rather than equities, which have higher return potential but also higher volatility.

Safe withdrawal rates also look a bit less generous on the opposite end of the spectrum, with equity allocations of 30% or less. Without as many stocks to power portfolio growth, the portfolios we tested supported slightly lower withdrawal amounts over time. However, the differences were relatively small—especially for retirees planning to spend only 10 more years in retirement.

What to Do If Your Withdrawal Rate Is Higher or Lower Than Our Targets

The numbers above can also be used to help fine-tune spending during retirement. Let’s look at two cases—one with a retiree who might be spending too much, and another who might not be spending enough.

Case 1: Spending Too High

Alice has been retired for 15 years and wants to plan for another 15 years. She’s spending about $37,000 per year, and her portfolio balance is about $450,600. This works out to a withdrawal rate of about 8.2%, which is slightly higher than our estimated safe withdrawal rate of 6.7% for a 15-year time horizon. She can get back on target by trimming annual spending to about $30,200 and then adjusting the new dollar amount by inflation each year. If that seems like it would involve too much belt-tightening, she could continue spending $37,000 per year but stop taking an inflation adjustment every year. That’s a relatively minor tweak that could still improve her odds of success.

Case 2: Spending Too Low

Bob has only been retired for about five years and wants to plan for an additional 25 years. Thanks to a generally bullish market environment, his portfolio balance has actually increased even though he’s been making withdrawals. He’s spending roughly $50,000 per year, with a portfolio balance of about $1.3 million, which works out to a withdrawal rate of about 3.84%. He could bump up his annual spending to about $57,000 to bring spending in line with our 4.4% starting safe withdrawal estimate for a 25-year time span. Or, he could keep spending $50,000 per year (with annual increases for inflation) and instead use the gap in spending for a one-time splurge or gift to family members or charity. For example, he could take out three years’ worth of “extra” spending ($21,000) to pay for a nice trip with his children and grandchildren or use that amount to help fund a 529 plan for a grandchild.

Conclusion: Check Up on Your Spending

Because market returns have been running above their historical average for quite some time, many retirees might find themselves in the second situation—with withdrawal rates a bit lower than they could be. The rosy market environment won’t last forever, but periodically checking up on how spending lines up with our target withdrawal rates can help retirees take advantage of the good times and pull back slightly if they’re spending too much.