Want a Higher Retirement Withdrawal Rate Than 4%? Here’s What You Need to Do

Many people work hard to build retirement savings. But once their careers are truly over, they’ll be disappointed when they realize they can only withdraw a limited amount from an IRA or 401(k) each year.

Financial experts tend to promote the 4% rule for managing retirement savings. The rule states that if you withdraw 4% of your IRA or 401(k) account balance in your first year of retirement and adjust future withdrawals for inflation, your savings should last 40 years.

On the surface, this rule makes sense. The problem is, it might not amount to the annual income you want.

If you start retirement with a $1 million IRA, which is arguably a lot of money, the 4% rule will only give you $40,000 per year. While there may be some money for you from Social Security on top of that, it may still not amount to the annual retirement income you’d hoped for.

The good news is that you may be able to earn more from your savings than the 4% rule allows. But to achieve larger withdrawals, you have to take some risks.

The 4% rule assumes that the typical retirement saver will maintain a fairly equal mix of stocks and bonds in his or her portfolio. If you want more annual income from your savings, the answer is simple – take on more risk. Increase the number of stocks in your portfolio so that your investments can generate higher returns.

If your retirement portfolio consists of 70% stocks and 30% bonds, you might be able to maintain a 5% withdrawal rate without risking running out of money. If your portfolio is 80% stocks and 20% bonds, you may feel comfortable withdrawing 6% or more of the balance each year.

Of course, this strategy is not without risks. It’s one thing to have 70% or 80% of your portfolio in stocks when you’re still working and you’re still many years away from retirement. Putting such a large percentage of your assets into the stock market is much riskier when you’re actively withdrawing from your retirement plan.

However, this strategy still works if you have a backup plan in the form of a generous cash reserve. If you always hold enough cash to cover two to three years of living expenses, you can help reduce much of the risk of investing in stocks.

Let’s say the stock market plummets during your retirement and takes a full two years to recover. If you have three years of cash available, you can allow your portfolio to weather a downturn on its own without locking in losses. This allows you to withdraw more funds during strong markets.

Of course, your approach to maintaining your retirement portfolio must ultimately come down to your personal risk tolerance. But if you find that a 4% withdrawal rate is too limiting, know that you Do There are other options. It’s just a matter of whether you want to exercise them.

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Want a retirement withdrawal rate higher than 4%? Here’s What You Need to Do Originally Posted by The Motley Fool