If you’ve saved diligently and are thinking about retiring soon, one of the biggest questions you might be asking is: How much can I safely spend each year in retirement? For many, the default answer is the 4% rule—withdraw 4% of your portfolio each year, adjust for inflation, and you should be set.
But is that really the best approach?
Let’s break this down with a real-life example and explore how a smarter withdrawal strategy—one that accounts for your actual spending needs, timing of Social Security, and taxes—can give you a more realistic and confident retirement plan.
Meet Donna
Donna is planning to retire at 60 with just over $2 million saved across her rollover IRA and 401(k). Following the 4% rule, she might assume she can withdraw $80,000 per year. She also expects to receive $40,000 annually in Social Security, beginning at age 67. So on paper, that looks like $120,000 of income per year.
Simple, right?
Not quite.
There are three key problems with this approach.
Problem #1: Social Security Doesn’t Start Right Away
If Donna retires at 60 but doesn’t start Social Security until 67, she has seven years where 100% of her income must come from her portfolio. That means she’s withdrawing far more than 4% in those early years. Once Social Security kicks in, she can draw less from her portfolio—but by then, she’s already made a significant dent in it.
This creates a mismatch between how much she needs to withdraw and when she needs it most—often during the early, more active years of retirement.
Problem #2: Taxes Take a Bite
That $120,000 of projected income? That’s before taxes. If Donna withdraws $80,000 from her IRA and adds $40,000 in Social Security, her gross income doesn’t reflect her actual spending power.
Depending on her tax situation, her after-tax income could be significantly lower—closer to $79,000. And as Social Security kicks in and her total income rises, her tax liability may increase, shrinking her spending budget even further.
Problem #3: The 4% Rule May Be Too Rigid
The 4% rule is a helpful starting point—but it’s not tailored to your specific needs or goals. In Donna’s case, using a flat 4% withdrawal strategy results in inconsistent cash flow. She lives on less in the early years, then sees a large jump in income when Social Security begins. But that doesn’t match how most retirees want to live.
Most people want to spend more early in retirement—when they’re healthy, active, and ready to travel or enjoy hobbies—and gradually reduce spending later on.
So how can we approach this differently?
Start With What You Want to Spend—Not a Rule of Thumb
Rather than asking, What can I spend based on my portfolio? a better question is: What do I want to spend—after taxes—and how can I make that sustainable?
In Donna’s case, let’s say she wants to spend $100,000 per year after taxes. We start with that goal and work backward. How much does she need to withdraw from her accounts to achieve that? And how should those withdrawals shift over time?
Using financial planning software, we can calculate her gross income needs, estimate her taxes, and determine a withdrawal strategy that allows her to maintain consistent after-tax income throughout retirement.
This strategy doesn’t rely on a fixed percentage. Instead, it allows for flexibility—drawing more in the early years before Social Security, and less afterward once another income source kicks in.
Smoothed-Out Cash Flow = More Freedom and Confidence
By front-loading withdrawals and filling the income gap before Social Security begins, Donna can meet her lifestyle goals right away—without waiting until age 67. Then, once Social Security starts, it reduces the burden on her portfolio.
This approach helps avoid the dip in income many experience early in retirement when they follow the 4% rule rigidly. It also avoids the psychological hurdle of living “on less” during the years you want to do more.
Even though Donna’s early withdrawal rate may be higher—say, 6%—it drops significantly once Social Security begins, and her overall long-term withdrawal rate becomes sustainable.
Don’t Forget the Retirement Spending Smile
Another important insight: most retirees don’t spend money in a linear way.
Research shows that retirement spending tends to follow a “smile” pattern. Higher spending in the early years (travel, leisure, active living), lower in the middle (as activity slows), and a potential uptick later in life due to healthcare costs.
Planning for this natural curve—rather than a fixed inflation-adjusted spending model—can dramatically improve the sustainability of your plan.
In Donna’s case, even adjusting inflation assumptions slightly (from 3% to 2% annual increases in spending) increased the probability of her plan’s success. It’s a small tweak that reflects reality better than rigid projections.
The Takeaway: Customize Your Plan
The key to a successful retirement isn’t just having a large portfolio—it’s having a personalized strategy that aligns with how you want to live.
- Don’t rely solely on rules of thumb like the 4% rule.
- Start with your desired lifestyle, not your portfolio balance.
- Account for the timing of income sources like Social Security.
- Plan for taxes—they can significantly impact your actual spending.
- Be flexible with withdrawal rates, especially early on.
By building your plan around your life—and not the other way around—you’ll gain clarity, confidence, and the freedom to retire on your terms.