The Retirement Number Nobody Talks About (It's Not How Much You Have - It's This)

Most retirement conversations focus on hitting a certain savings target. If your account hits a certain dollar amount, there's nothing to worry about. However, any good retirement plan will home in on a better metric, one that really determines how long your account will last.

Here's why there's another retirement number that no one talks about that's way more important than your total account balance.

The most important retirement number isn't what you think

How much you spend from your portfolio each year, expressed as a percentage, is the most important number to fixate on. A retiree with $1.5 million who withdraws 7% annually is better off than someone with $900,000 who withdraws 3.5%. If you run out of funds, you'll be in a tough financial position, and you'll be forced to sell your assets or even move in with other family members.

What's the ideal withdrawal rate?

According to recent research, 3.9% is the highest safe starting withdrawal rate for retirees planning a 30-year retirement, with a 90% probability of not running out of money. On a $1 million portfolio, that is $39,000 in year one. The 3.9% figure assumes fixed, inflation-adjusted withdrawals with no Social Security or other income counted. It is the conservative baseline for someone who wants a predictable spending level and no surprises.

Why the 4% rule gives a slightly different number

The 4% rule has been the standard shorthand in retirement planning for decades. Financial planner William Bengen published the original research in 1994, analyzing U.S. market data going back to 1926 to find the highest withdrawal rate that survived every 30 years in history.

The new data and 3.9% approach uses forward-looking projections for asset classes, inflation, and market conditions rather than historical data. Given how rapidly markets shift and the disruption caused by economic downturns and new technologies, it makes more sense to have that forward-looking approach.

Can you still spend more than 4%?

The ~4% is the floor for the most conservative approach. Retirees with flexibility or additional income sources can withdraw more without increasing their risk of running out.

Things like delaying Social Security, maxing out catch-up contributions, and using a more conservative withdrawal approach in the early retirement years can make a huge impact. The tradeoff is that by maximizing your lifetime income, you'll reduce what is available for your heirs.

The timing risk that derails otherwise solid plans

Starting with the right withdrawal rate still leaves one major variable that can tank retirement accounts: the market going into a downturn. This is known as a sequence of returns risk. The danger is that a downturn in the early years of retirement permanently shortens the duration of savings.

When you sell investments during a downturn to cover expenses, those shares are gone. They cannot participate in any recovery or compound. During working years, the order of returns matters little. Once withdrawals start, early losses compound in a way that later gains cannot undo.

A retiree starting with $1 million who encounters a down market early, then a bull run, can still run out of money in 25 years. An investor with identical average returns in the reverse order keeps money well past that point. The highest-risk window runs from five years before retirement through the first decade after retirement, when the portfolio is near its peak value and early losses have the most time to compound.

Having a flexible strategy and diversifying your investments can help prevent this from tanking your overall portfolio. Having a good amount of capital locked up in long-term, stable bonds will help shield you from market crashes.

How to calculate your withdrawal amount

The math is straightforward: simply divide your planned annual withdrawal by your total portfolio value.

If you have $800,000 saved and plan to take $32,000 per year, that is $32,000 divided by $800,000, which equals 4%. You can reverse it too: if you want $40,000 per year and plan to use a 4% rate, divide $40,000 by 0.04 to see that you need $1 million saved.

The number you land on is your starting point. What you do with it from there depends on your income sources, your expected lifespan, and how much flexibility you have to cut spending in a bad market year.

Why healthcare alone can push you past your withdrawal limit

Most retirement plans undercount medical costs. It's now estimated that a 65-year-old retiring this year will need an average of $172,500 in after-tax savings just to cover medical expenses throughout retirement. For a couple, that number climbs to $345,000. Neither figure includes long-term care or any type of specialized care that might be required later in life.

The average American estimates they will spend about $75,000 on healthcare in retirement, less than half of the projected cost. Throw in that healthcare cost inflation runs at roughly 5.8% over the long term, and suddenly a withdrawal rate that works on day one can come under strain by year ten if medical costs are growing faster than the portfolio. That's why it's so critical to have more in your accounts than you think is necessary and to withdraw only what you need to at first.

Bottom line 


Getting your retirement numbers right means accounting for more than just projected market returns. Healthcare costs, sequence risk, and the gap between what people think they will spend on medical care and what they actually spend can all push a plan off course before the first decade is over. That's why the withdrawal rate has such a massive impact on your overall retirement plan.

Retirees who experienced poor returns in the first five years and did not adjust their spending were far more likely to run out of money. The withdrawal rate is not a number you set once and ignore if you want a stress-free retirement. It is one to revisit when markets turn against you, when medical costs climb faster than expected, and when the gap between planned and actual spending widens.