Set realistic expectations

One of the biggest mistakes retirees make during their first years of retirement is to withdraw too much money from their retirement savings. It's a common mistake — and it's easy to understand. Think back to the late 1990s. When stocks were returning 20% a year or more, a 10% withdrawal rate seemed conservative to many new retirees. Even many financial experts claimed that you could withdraw 8% and preserve your assets for the long term.

How much can I withdraw each year?
Use our withdrawal estimator to see how withdrawing just 1 or 2% more each year can have a dramatic effect on how long your savings will last.

However, since then a great deal of research has been done by several investment companies to determine the ideal withdrawal rate, using actual market data as well as hypothetical worst and best case scenarios. Several recent studies by prominent investment companies have generally concluded that in order have a high level of confidence that your assets will last for 25 years or longer, you should limit your annual withdrawal rate to 4% of your total savings. What's more, this figure assumes that approximately 40% to 50% of your portfolio is invested in the stock market, which should give it reasonable growth potential.

Why is the suggested withdrawal rate so low? Because you have to be prepared to weather a sharp downturn in the stock market, especially one that occurs during your early retirement years.

Even if your portfolio is invested entirely in conservative assets, such as Certificates of Deposit or money market funds, you face the challenge of falling interest rates or yields. When yields on conservative instruments (CDs, money market funds) dropped to 2.0% or less between 2001 and 2004 retirees who relied on "yield" for their regular income faced serious shortfalls.

Of course, there are many variables to consider when you choose a withdrawal rate for your own portfolio—how long you expect your money to last, your average rate of return and also the rate of inflation. For the past 25 years, inflation has been relatively tame. Even so, it's important to build the expectation of inflation into your plans to withdraw money from your retirement investment. At 3%, inflation reduces your purchasing power by nearly 50% in less than 20 years. That means you'll need twice the income at age 85 to generate the same purchasing power as you did at age 65.

If you want to get a rough idea of how long your savings might last, choosing a withdrawal rate and a return rate, take a look at the calculator below. A 3% inflation increase is built into the assumption on withdrawals. Anything over 50 years is marked with an asterisk. If you don't like the answer, try another set of rates.

Withdrawal Estimator

The purpose of this exercise is to help you set realistic expectations. Even though you're retired, it's not too late to adjust your thinking about how much you can withdraw to keep your retirement savings on track for a lifetime of income.

AARP Financial Inc. does not provide tax advice. Please consult a tax advisor for information pertaining to your particular situation.

The information and content provided herein is general in nature and is for informational purposes only. It is not intended, and should not be construed, as a specific recommendation, or legal, tax or investment advice, or a legal opinion. Individuals should contact their own professional tax or investment advisors or other professionals to help answer questions about specific situations or needs prior to taking any action plan based on this information.

The Financial Advisors are investment adviser representatives of AARP Financial Inc., an investment adviser.

While AARP endorses the services provided by AARP Financial Inc., AARP does not offer financial products or services itself and cannot recommend that you or any specific individual should purchase any particular product or service. AARP Financial Inc. is an investment adviser and a subsidiary of AARP.