How to Stop Running Out of Money in Retirement

Retirement means transitioning from earning money to spending money. The biggest fear for anyone is running out of savings. The tool used to manage this fear is the Retirement Drawdown Simulator, which helps you find a Safe Withdrawal Rate (SWR)—the highest percentage of your savings you can spend each year without depleting your portfolio over your lifetime.

Here is a guide to the most famous SWR rule, how modern strategies differ, and what a good simulator must account for.

The Starting Point—The 4% Rule

The 4% Rule is the most famous guideline for retirement spending, providing a simple starting point for withdrawal.

What the Rule Says

1. First-Year Withdrawal: In your first year of retirement, withdraw 4% of your entire portfolio's balance.
2. Inflation Adjustment: In every year that follows, adjust that initial dollar amount by the rate of inflation.

• Example: If you retire with $1,000,000, you withdraw $40,000 in Year 1. If inflation is 3%, you withdraw $\$40,000 \times 1.03 = \mathbf{\$41,200}$ in Year 2.

The Assumption Behind the Rule

The original research behind the 4% Rule (known as the Trinity Study) assumed a 30-year retirement period and a portfolio split between stocks and bonds (often 50% to 60% in stocks) would be successful in nearly all historical market conditions.

Using the Calculator for Quick SWR Planning

While the 4% rule is a simple mental benchmark, your personal SWR should be calculated precisely based on your savings and current estimates.

Find Your First-Year Withdrawal

Use the quick calculator below to find your starting dollar amount and see how inflation immediately affects your Year 2 spending.

Note on Rates: Remember that using a higher SWR (e.g., 5%) increases your initial withdrawal amount but lowers the long-term success rate of your portfolio. Financial planning relies on balancing these variables.

What a Drawdown Simulator Checks

Modern retirement planners know the rigid 4% rule doesn't work for everyone, especially with longer lifespans and volatile markets. A good drawdown simulator uses complex mathematics (like Monte Carlo analysis) to test your portfolio's endurance against thousands of possibilities.

A quality simulator requires you to input several variables:

1. Portfolio Size and Mix: Your current savings and your chosen asset allocation (e.g., 60% stocks, 40% bonds).
2. Planning Horizon: How long you expect your retirement to last (e.g., 25, 30, or 40 years).
3. Expected Inflation: The annual rate you anticipate prices will increase.
4. Confidence Level: Your risk tolerance. A 90% confidence level means the simulator runs 1,000 market scenarios and finds that 900 of them result in the portfolio not running out of money.

The Output: The simulator tells you the maximum dollar amount you can withdraw in Year 1 while maintaining your desired confidence level against outliving your money.

The Safe Way to Spend (Beyond the 4%)

Financial planners often recommend moving away from the rigid 4% rule toward a dynamic withdrawal strategy that adjusts to market performance.

1. The Bucket Strategy

This approach divides your retirement savings into time-based "buckets" based on when you plan to spend the money:

• Bucket 1 (Short-Term: 1–3 Years): Holds cash and ultra-safe assets (CDs, Money Market Funds). This money is used to fund spending immediately, ensuring you never have to sell stocks during a market crash.
• Bucket 2 (Intermediate: 4–10 Years): Holds moderate-risk assets (long-term bonds, dividend stocks). This bucket replenishes Bucket 1.
• Bucket 3 (Long-Term: 10+ Years): Holds growth assets (stocks, ETFs). This bucket provides the growth needed to sustain the portfolio over a 30-year horizon.

The Benefit: This strategy creates a psychological safety net during market downturns, allowing the long-term assets to recover without the pressure of forced selling.

2. Dynamic/Flexible Spending

The most effective strategy is simply to be flexible. The 4% rule fails when people refuse to cut spending during a severe market slump (like the one that hits right after retirement).

• The Adjustment: Commit to reducing your annual withdrawal amount (e.g., cutting back on luxury travel or large purchases) if your portfolio value drops significantly in any given year. This flexibility dramatically increases your portfolio's probability of surviving a long retirement.

Conclusion: Balancing Safety and Enjoyment

The Retirement Drawdown Simulator is your best tool for planning, as it provides a personalized SWR based on current market conditions and your asset mix. View the 4% rule as a simple starting benchmark. For a truly safe retirement, you must combine that starting number with a strategy—like the Bucket approach—and a commitment to adjusting your spending when the market dictates.