Today’s question comes from Scott in FL!…
“Hi, guys, it’s Scott and Florida. My question is about the 4% percent rule for ROTH and 403b account withdrawals.
I’m getting fairly close to retirement, maybe in about 5 years, and trying to calculate my retirement income. I will have 2 pensions covering about 40-50% of my current income, plus Social Security.
I also have a 403b and Roth IRA. It seems like withdrawing 4% from these accounts is too conservative, especially considering I have the pensions and Social Security to fall back on.
If I’m able to earn ~5% percent or more on my money, wouldn’t my accounts last in perpetuity? I’d rather take out more money when I’m healthy and can enjoy it.
So why not take out 6 or 7% or maybe even more in my situation? Then I could live on less through the pensions later on. Thanks for your help.”
The short answer:
Ooooh what a great question, Scott!
The reality is, you’re in the fortunite position where you may have over-saved for retirement. Congrats – it’s a great position to be in!
If your math is correct, it means you can probably withdraw a little more than most people would, and spend freely if you want!
You have a diverse mix of retirement income which gives you a certain advantage. Let’s talk more about the 4% rule and the assumptions it’s built on…
4% safe withdrawal rate
Dave Ramsey went on a rant recently stating that folks can easily take 8% a year out of their retirement account & never run out of money.
But this was based on the (rather dumb) assumption that if your portfolio grows at 12% each year, and you account for 4% inflation, this leaves you with 8% to withdraw each year and live on.
Sadly, Dave’s advice doesn’t hold up to closer scrutiny. Because it doesn’t allow for inevitable market swings! Investments don’t grow in a straight line.
That’s why the 4% “safe” withdrawal rate was invented. It’s based on a massive study back in 1998 called the Trinity Study.
The 4% rule was a specific scenario where you held a balanced portfolio of stocks/bonds. And by withdrawing 4% of the portfolio’s value each year (plus that current year’s inflation number) the investor’s portfolio would last through at least a 30-year retirement.
Here’s the table data from that study:
As you can see, in some cases withdrawing 5% or even 6% came out with a 100% success rate over the decades.
But all things considered, for the average investor and retiree, 4% is where the sweet spot is.
Multiple income streams
There’s a really good chance that you can take out more than 4% of those Roth and 403b accounts, Scott.
That’s because your pensions and social security give you a dependable baseline of income. You only need to withdraw any excess required to live on.
And as you already calculated, withdrawing 4% seems too conservative for you.
Most people are trying to make their nest eggs stretch out and last as long as possible. But for you, there’s flexibility to drain those accounts at a faster rate, knowing you have other forms of income to rely on.
This is a perfect case proving that income diversification gives you more options later in life. Not all folks have a pension from their employer. But they can still build a well-diversified portfolio across 401ks, Roth IRAs, real estate, etc.
Spending more, carefully
I love your goal of using more of your money while you’re healthy and have more ability to enjoy it. That’s a worthy cause.
Being too conservative comes with a real opportunity cost. That’s true both in retirement and as you’re saving for retirement. (Which is why we’re not all-in on the FIRE movement).
But something to watch out for… I’ve also talked to some retirees who seem to think that the money they’ve saved up for retirement is fair game to blow any way they want when they finally retire. Like all of it.
And that screws them over later. They might live far longer than they had planned for. Or have bigger expenses than they expected.
You’ve gotta plan for the long term, and build in safeguards for your older years.
Scott, you can relax a bit knowing you’ve got other sources of income that can fund most of your monthly expenses. Increasing your withdrawals & spending in those first few years of retirement seems reasonable to us given your financial situation.
Just don’t go overboard. 😉
Don’t forget about taxes
Since you’ve got multiple account types to withdraw from, you get to play the fun game of trying to minimize taxes each year.
Pulling out $20k from your Roth IRA in retirement vs. your 403b account is treated very differently. One is a pre-tax account and the other is post.
And don’t forget to plan for income tax on your pension income as well as your Social Security payments.
This might change the way you withdraw funds, or how much you take out of each bucket. You might also want to look into Roth IRA conversions in those earlier years!
Talk to a financial planner
It also might be worth talking to a financial planner about when and how to withdraw those funds.
And whether an immediate annuity might be a smart choice for at least some of those funds. It could offer a predictable stream of income every month.
You’ll still want to have exposure to the stock market, but taking some chips off the table could make sense.
The Bottom Line:
Scott, you sure sound like someone who has saved and invested well over the years. I would think of the 4% rule as more like a helpful rule of thumb.
If you adhere to it stringently you’re likely to see your nest egg grow over the years given your situation. With careful planning, increasing your withdrawals in some of your early retirement years to 5, 6, or even 7% of your portfolio could be just fine. You can always dial back your withdrawal rate down the line.
Congrats again Scott, and good luck!!
For the full version of this discussion, check out Podcast Episode #790 (it’s the 3rd question in the episode)
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