Forget the 4% Rule: This Income Strategy Lets Retirees Safely Withdraw 5.5%

The 4% withdrawal rule is one of the most common retirement strategies for tapping into your nest egg without running out of funds. However, there are income strategies you can use to safely withdraw 5.5% of your nest egg each year. It’s not for everyone, but optimal timing and effective portfolio construction can make this goal more realistic. 

Retire Later

Not everyone is in a rush to leave the workplace. Some people love their careers, and others work at low-intensity jobs that they can easily do into their 70s. If you wait until you are 70 to retire, you can more safely withdraw 5.5% of your nest egg each year.

Most people retire in their 60s, which gives their retirement portfolios more time to potentially run out of funds. That’s why the 4% withdrawal rule is a common approach. However, you won’t have as many retirement years if you leave the workforce at 70, which will give your money more time to stretch.

Social Security will also act as a good financial buffer that can support your living expenses. While you shouldn’t bank on Social Security saving you in retirement, it’s an additional resource that will make it easier to preserve capital and keep up with inflation.

Withdraw More When The Market Performs Well

If your portfolio generates annualized returns above 5.5%, then you can withdraw 5.5% each year without worrying about running out of money. Some people put most of their money in index funds, hoping to outperform an elevated withdrawal rate each year.

It’s still good to have some cash sitting around so you can cover 1-2 years of living expenses without withdrawing from your portfolio. That way, you don’t have to aggressively cut back on expenses or sell more assets at a loss when the market enters a correction. 

While the high cash position gives you more time to stay in the market, investors can also withdraw more money from the stock market during good years, especially if they have low cash reserves or are deeper into retirement. That way, they can withdraw higher percentages and build up their cash reserves so they don’t have to withdraw as much money when the stock market doesn’t perform as well.

Combine Income With Growth

Building a portfolio that yields 2% or 3% knocks out half the battle. Then, it comes down to selling assets to cover the gap. You can have dividend income stocks provide steady cash flow and allocate some money toward growth stocks that can outperform the stock market. Then, occasionally trimming these positions can give you the extra 3% withdrawal rate that gets you close to a 5.5% withdrawal rate.

Dividend stocks offer cash flow that lets you cover living expenses without needing to sell shares. Then, you can sell growth stocks if needed to address remaining expenses. These strategies, combined with Social Security, can ensure most retirees never run out of funds.