If you’ve done everything right on your way to retirement, when the day finally comes you might feel like you deserve to splurge with a bit of your well-saved money. But there’s a rule of thumb you should follow for your retirement account withdrawals if you want to make that money last.
Experts advise that you withdraw no more than 4 percent of your retirement funds each year if you want to make sure your money lasts for thirty years. Play around with this math, and you’ll get a good idea of how much money you really need to save for retirement for the lifestyle you want.
For instance, say you’ve saved $500,000 for retirement and your last day of work has finally arrived. Multiply 500,000 by .04 and you’ll learn that you can take out $20,000 each year and still have plenty for future years. If that isn’t enough for you, you’ll know you need more in order to retire. The 4 percent rule on a savings of one million would allow you to withdraw $40,000 per year.
The math isn’t perfect, but it gives you a rough number to shoot for depending on how much money you think you’ll need for expenses when you retire. Many people don’t just use this rule for life in their 60s, 70s, and beyond, though—if you’ve heard of the FIRE movement (Financial Independence, Retire Early), many of those people are hoping to amass as much money in their younger years as possible, so they can start withdrawing that 4 percent earlier, while maintaining strong financial footing.