How to Manage Your Retirement Withdrawals

Calculating how much money to take out of a nest egg can be more complicated than building one.

Written by Walter Updegrave June 6, 2014

Walter Updegrave

After saving diligently and investing carefully throughout your career, you might figure that come retirement time you could set financial concerns aside, kick back, relax and enjoy living off your savings.

If only. These days managing withdrawals from a nest egg can be more complicated than building one. For example, a February report from J.P. Morgan Asset Management claims the traditional standard for how much retirees can safely pull from savings—start with 4%, then adjust for inflation—simply isn't realistic given today's low interest rates and volatile markets.

Indeed, research by professors Wade Pfau at the American College in Bryn Mawr, Pa., and Michael Finke at Texas Tech, with David Blanchett, head of retirement research at research firm Morningstar, suggests that you may need to limit yourself to an initial withdrawal of 3%, if not less, if you want your savings to last 30 or more years.

As for the once widely accepted notion that you should plan that your retirement spending will rise at the rate of inflation, well, that's up in the air too. Mr. Blanchett estimates that retirees' outlays may actually decline by as much as 20% after inflation as they age.

Given this uncertainty about such fundamental questions, how can you generate the income you will need in retirement without devoting all your time to number crunching or constantly worrying you will end up broke?

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Clearly, there are too many unknowns—market returns, health-care costs, how long you will live—for any person or any system to predict your precise income needs, let alone the optimal amount you should withdraw from your nest egg over the course of a long retirement.

Still, if you follow the steps below and, above all, stay flexible, you should be able to avoid running out of money too soon—or stinting so much that you end up with a big pile of assets late in life, along with regrets that you didn't live larger early on.

Retirement Budgeting

Start by creating a retirement budget, which you can do online with a tool like Fidelity's Retirement Income Planner or Vanguard's Retirement Expenses Worksheet. The aim isn't to be accurate down to the penny. Rather, you want to come away with a reasonable sense of the expenses you will face initially, as well as a baseline that will help you gauge whether your spending is heading up or down as you age. While you are totting up your outlays, designate them as either essential or discretionary. This will help you assess how much wiggle room you will have should you need to pare spending later on.

Next, focus on Social Security, especially on whether you may be able to increase the amount you receive. Each year you postpone collecting beyond age 62 to age 70 can raise your monthly payment roughly 7% to 8%.

By coordinating their benefit starting dates and using claiming strategies like "filing and suspending" and/or doing a "restricted application," married couples have even more opportunities to boost their joint lifetime benefits. You can try out different scenarios on the free Social Security Benefits Evaluator at or consult a service like, which will recommend a strategy for a fee ranging from $20 to $250.

The Annuity Option

If you think you will want more assured income than Social Security alone will provide, consider investing a portion of your savings in an annuity.

Before your eyes glaze over at the mere mention of an annuity—or you automatically dismiss the option because you equate annuities with onerous fees—you should know that there is one type that can be both simple and cost-efficient: immediate annuities.

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With these, you hand over a lump sum to an insurer in return for monthly income as long as you live. For an estimate of how much you might receive each month after expenses, simply enter your age, income start date, and amount to invest, in our Immediate Annuity Calculator, and click the Get My Quote button. Your quote will appear instantly on the next page.

At this point, you can start dealing with the question of how much to pull from your savings. If your nest egg is so big that a 3% withdrawal will provide enough to live on, good for you. But if you are like most people, you probably will have to opt for a higher withdrawal rate, say between 4% and 5%, to generate anything close to sufficient income.

You can opt for an even higher withdrawal rate, of course, but your chances of being able to sustain it for upwards of 30 years will decline precipitously.

Scaling Back Withdrawals

Whatever amount you start with, be prepared to adjust it as your needs and market conditions inevitably change. If your nest egg's value plummets due to a combination of large unforeseen expenses and a market setback, you may have to scale back withdrawals to avoid depleting your savings prematurely.

Conversely, if a string of outsize returns sends your retirement portfolio soaring, you may want to withdraw more and indulge yourself a bit (unless you are OK with leaving behind a sizable legacy for your heirs).

This sort of fine-tuning is as much art as science. But if you plug in your current savings balance and planned spending for the coming year into a calculator that relies on Monte Carlo simulations, which explore a vast range of possible scenarios, to calculate the odds your savings will last, you can get a decent sense of whether you need to tweak withdrawals. (You can find such calculators on both Fidelity's and T. Rowe Price's websites.)

Repeat this exercise every year or so, and you should be able to make gradual adjustments to your spending that will allow you to avoid drastic changes in your standard of living—and enjoy retirement without worrying whether you are spending through your nest egg too quickly, or not quickly enough.

Source: The Wall Street Journal

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Comments (4)

  1. Ruth
    2018-12-19 14:20:42

    Upon separation from JC Penny at the age of 48 the company sent me a check for the pension that i earned while working there because it was under $5000.00. Do I owe the 10% penalty for early withdrawal? It is their policy to pay it out if the amount is under $5000.00.

  2. Hersh Stern (
    2018-12-19 14:21:08

    After receiving the check, did you rollover the amount into a Traditional IRA? If not, I'm not aware of any exception that would exempt you from the 10% penalty. I would recommend consulting a CPA to get a definitive answer to your question. Best of luck!


  3. Vikiann
    2019-06-20 11:19:37

    I am new to the idea of annuities and having listened to Jane Bryant Quinn I went to your site.
    I am 76, female, with social security and real estate investment income currently. The real estate is beginning to liquidate so am looking for simple immediate annuities and some cash availability if needed. Where do I start? 3 of my properties are held in my IRA, the rest cash. I currently get checks monthly from all investments.

  4. Hersh Stern (
    2019-06-20 11:20:14

    If you're looking for a good place to start, I would recommend running some immediate annuity quotes by using the calculator on our homepage ( The calculator will give you a good sense of what type of income you should expect to receive based on the funds you have available.

    You also mentioned that you will have both IRA and cash monies available to purchase these immediate annuities. Both types of monies are perfectly fine to use. However, keep in mind that you cannot comingle IRA and cash monies in the same immediate annuity. You would have to do two separate immediate annuities (one for the IRA money, one for the cash).