🎯 In 30 seconds: In retirement the question flips from how much to save to how much you can safely spend. Start with guaranteed income (Social Security, pensions), cover the gap from savings at a sustainable rate, keep a few years of spending out of stocks so a crash early on does not force sales, and plan taxes around required minimum distributions.
Build the paycheck in layers
- List essential yearly spending (housing, food, health care, insurance, taxes) and flexible spending (travel, gifts).
- Subtract guaranteed income: Social Security, pensions, any annuity income.
- The gap is what your savings must supply each year. Covering essentials with guaranteed income and flexible spending from investments is a common design.
The 4% rule: where it came from and its limits
In 1994 financial planner William Bengen tested historical US market data. He found that withdrawing 4% of a portfolio in the first year, then raising that dollar amount with inflation every year, never ran a portfolio of 50% to 75% stocks (the rest in intermediate-term Treasuries) dry in less than 33 years in any period he tested.
| Portfolio at retirement | $800,000 |
| Year 1 withdrawal (4%) | $32,000 |
| Year 2 if inflation was 3% | $32,960, whatever the market did |
Treat it as a starting point, not a promise:
- It is built on past US returns. Future returns may be lower or higher.
- It assumed about 30 years. Someone retiring at 55 may need 40.
- It ignored fees. A 1% annual fee takes a large bite out of a 4% withdrawal.
- It is rigid. Real retirees cut back after bad years, and that flexibility is one of the best protections available.
Sequence-of-returns risk
The order of returns matters once you are withdrawing. Two retirees start with $800,000, withdraw $40,000 at the start of each year, and get the same five annual returns in opposite order:
| Returns in order | Balance after 5 years | |
|---|---|---|
| Bad years first | −20%, −10%, +10%, +10%, +15% | $559,075 |
| Good years first | +15%, +10%, +10%, −10%, −20% | $634,101 |
Same average, same withdrawals, a $75,000 gap. Losses early force you to sell more shares at low prices, and those shares are not there for the recovery. The first five to ten years of retirement carry the most of this risk.
A bucket approach
| Bucket | Holds | Purpose |
|---|---|---|
| 1. Cash | 1 to 2 years of withdrawals in high-yield savings, money market funds or CDs | Pays the bills; you never sell stocks in a crash |
| 2. Bonds | Several more years of withdrawals | Refills bucket 1 when stocks are down |
| 3. Stocks | The rest | Long-term growth that refills the others in good years |
Once a year, top up the cash from whichever bucket has done well. This is a way of organizing the same diversified portfolio, not a new investment.
Required minimum distributions
- Traditional IRAs, 401(k)s and similar accounts must start paying out RMDs at 73. Under SECURE 2.0, the age rises to 75 for people born in 1960 or later.
- The first RMD can wait until April 1 of the following year, but then two RMDs land in one tax year.
- Miss one and the excise tax is 25% of the shortfall, cut to 10% if corrected within two years.
- Roth IRAs, and Roth accounts in 401(k) and 403(b) plans, have no RMDs while the owner is alive.
Roth conversions in low-income years
Many people have a few low-income years between retiring and starting Social Security and RMDs. Converting part of a traditional IRA to a Roth in those years means paying tax now, at a possibly low bracket, so that future withdrawals are tax-free and future RMDs are smaller.
- The converted amount is taxable income in the year you convert. Convert up to the top of a chosen bracket, not more.
- Pay the tax from cash outside the IRA if you can.
- Higher income can raise Medicare premiums for high earners a couple of years later and can reduce health-insurance subsidies before 65. Run the numbers with a tax professional first.
Check your progress toward a number with the calculators on the Secure Your Future page.