Why JPMorgan says you shouldn’t withdraw so much from your retirement accounts

By | March 5, 2024

Here’s how much you can take out of your retirement accounts each year, according to JPMorgan

JPMorgan Chase says persistent inflation and the prospects for sharply lower returns for investors mean retirees should abandon the long-standing 4% rule. That’s the rule that says retirees can safely withdraw their savings at 4% per year without fear of running out of money before they die. Failure to reject this rule could mean cutting back on your spending or even watching your savings disappear. Instead, the big bank recommends withdrawing no more than 2% or 3% of your savings each year. Consider working with a financial advisor as you prepare for a worry-free retirement.

What is the 4% rule

The 4% rule was first formulated in 1994 by financial planner Bill Bengen. It requires you to spend 4% of your retirement savings in the first year of retirement and then adjust that percentage for inflation each year. Doing so would leave retirees running out of money every 30 years since 1926, even when economic conditions were at their worst, Bengen said.

For example, a retiree with $1 million in savings would withdraw $40,000 in the first year of his or her retirement. Because all subsequent withdrawals are adjusted for inflation, the same retiree would withdraw $41,200 in the second year of retirement if inflation were 3%.

Why it’s time to break the 4% rule

Here's how much you can take out of your retirement accounts each year, according to JPMorganHere's how much you can take out of your retirement accounts each year, according to JPMorgan

Here’s how much you can take out of your retirement accounts each year, according to JPMorgan

Earlier this year, however, Bengen said the 4% rule should be abolished. And the reasons for that are numerous. First, people live longer. According to the Social Security Administration, the average man who turns 65 today can expect to live until age 84.3. Its female counterpart can live an average of 86.6 years. Research has suggested that millennials can live well into their 90s and beyond, so there’s even more pressure to boost their retirement savings.

The 4% rule also does not take individual savings interest rates into account. Millennials have the lowest participation rate when it comes to saving in an employer-sponsored plan, and a recent report shows that 56% of them are less likely to save for retirement outside of work. That means a significant number of young workers could find themselves in retirement.

JPMorgan also recommends abolishing the 4% rule due to the prospects of lower yields and higher inflation – “which all economists now see on the horizon” – meaning the 4% rule could be a recipe for serious financial problems . While the S&P 500 has returned an average of 10% over the past decade, the bank’s recently released long-term capital market assumptions predict that a 60/40 portfolio will return just 4.3%.

For example, the bank said it is almost 100% likely that a 60-year-old with a $30 million taxable portfolio would run out of money if she spent 4% of her portfolio (i.e. $1.2 million) over the next thirty years . .

If you’re ready to be matched with local advisors who can help you achieve your financial goals, start now.

What to do instead

Given the degree of variability in retirees’ spending habits and investment outcomes, JPMorgan has suggested six factors to consider when developing a withdrawal strategy tailor-made for you.

  • Tax Rates – What is your combined federal, state and local tax rate?

  • Financial Obligations – Do you want to leave a legacy or benefit your descendants?

  • Additional Resources – Do you own illiquid but unencumbered assets such as real estate, trusts or an inheritance?

  • Healthcare Costs – How do you estimate your ongoing medical needs?

  • Ages of Life Partners – A 65-year-old couple today faces a 72% chance that at least one person will live to be 90 years old, and a 44% chance that that person will live to be 95 years old.

  • Portfolio Construction – How much do you have in taxable versus tax-deferred (i.e. traditional IRA) versus tax-free (i.e. Roth IRA) accounts? If you have a concentrated position, you may need to set aside more to account for that risk so that your lifestyle is not compromised. Maybe you have a lot of built-in profits and will need extra money to pay taxes when they are eventually sold.

Other analysts have also found alternatives to the 4% rule. A Morningstar study found that, assuming an initial withdrawal rate of 3.3%, a retiree with a portfolio evenly split between stocks and bonds has a 90% chance of maintaining a positive account balance after 30 years. The heavier the portfolio’s equity position, the lower the initial withdrawal rate should be.

In short

Here's how much you can take out of your retirement accounts each year, according to JPMorganHere's how much you can take out of your retirement accounts each year, according to JPMorgan

Here’s how much you can take out of your retirement accounts each year, according to JPMorgan

The prospect of continued high inflation and sharply lower market returns of 5% or less means that the 4% withdrawal rule should be replaced with a rule calling for a 2% to 3% withdrawal. Be sure to weigh all relevant factors as you devise a withdrawal strategy that suits your risks and estimated needs.

Tips about retirement

  • A financial advisor can help you find creative ways to enjoy retirement without spending more than 2% or 3% of your savings each year. Finding a qualified financial advisor doesn’t have to be difficult. SmartAsset’s free tool matches you with up to three financial advisors serving your area, and you can interview your advisors for free to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.

  • If you don’t have access to a 401(k), consider opening an IRA or a Roth IRA as a way to save for retirement.

Photo credits: ©iStock.com/dobok, ©iStock.com/lakshmiprasad S, ©iStock.com/AJ_Watt

The post JPMorgan Says You Can Safely Withdraw That Much From Your Retirement Accounts Each Year appeared first on SmartAsset Blog.

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