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My Retirement Drawdown Strategy: Why I Don’t Follow the 4% Rule

Contributor Greg Davis
Editor Vinci Palad

YOU HAVE WORKED HARD, SAVED, INVESTED — all with the goal of having enough to live the retirement life you want. 

As retirement day approaches, you look at the balances of your various accounts and think, “Now, what should I do?” 

You may have heard some broad guidelines about the “right” amount to withdraw each year and the optimal order for tapping your various sources of income. 

While there are often kernels of truth in these rules of thumb, they gloss over the fact that everybody’s retirement is different — and much too important to be guided by a formula.

As you consider your personal equation for drawing down your retirement income, three primary questions are worth asking:


1. How much can I safely spend each year?

According to one retirement rule of thumb, retirees should look at tapping into about 4% of their savings annually. But that is just a rough guideline and one that does not consider variables such as the age at which you are retiring and whether your income needs will change as you age.

Based on our last two years of retirement expenses, as analyzed in our budget software, “You Need a Budget” (YNAB), we spend approximately $12k per month, or $144-150k annually. 

While the above 4% rule would indicate that we could spend a bit more, we are comfortable at this spending level. This annual spending level allows for several vacation trips each year.

We have been fortunate to travel to Hawaii and tour Canadian cities over the past two years. We also love to dine at the excellent Philly restaurant scene. Thus, it is no surprise that this line item represents 10% of our annual spending! 

Your task is to plan your retirement spending in advance of your retirement. This is where the use of budgeting tools (such as YNAB) is extremely helpful in determining the proper amount of spending for your situation.

As part of my book research, I interviewed Tim Koller, a retired financial manager with the CERTIFIED FINANCIAL PLANNERTM designation, who was a member of our RBC financial advisory team. When asked as to what surprised Tim the most about his retirement, he revealed, “We are spending at least what we did prior to retirement and then a little more.”

While Tim and I share strong financial backgrounds, we are spending more in our sixties in retirement than before retirement. Tim said, “This is typical for many couples during the first five to ten years of retirement.”

A timely article on retiree spending states that in your early retirement years, you may spend as much or even more than you did while you worked, depending on your lifestyle

The major reason given is higher costs due to travel, inflation, and lifestyle changes, such as dining out more often. Per my budget analysis, I would say that my wife and I are spending about 5% more than anticipated.

As we navigate our new city, we eat out more often, enjoy lots of nearby shows and concerts, and deal with the highest inflation in the past year or so in over forty years.  


2. What is the proper order in which I should tap into my retirement accounts?

In this case, the conventional wisdom goes that you should withdraw from your taxable accounts first, tax-deferred accounts secondarily, followed by tax-free accounts

That’s because the money you take from a taxable account (such as a brokerage account) will likely be taxed at the rate for capital gains or qualified dividends, which varies depending on your tax bracket. 

It’s generally a lower rate than what you would pay on ordinary income from 401(k) plans, traditional IRA, and other tax-deferred savings.

Adjusting your mindset from building your nest egg to spending it can be challenging. As a nerdy accountant, one of my biggest retirement challenges was not receiving a monthly paycheck during the fall of 2021 after receiving one for forty years or 480 months. 

To make your initiation to retiree life easier, create a plan for how you will pay yourself in retirement. Begin by tallying your income sources (e.g., Social Security, 401(k), 403 (b), IRA, pensions, annuities, and other savings accounts) before determining which ones you will tap into first. Next, estimate your cash needs for your first year. 

Once you hit age 59½, the IRS lets you withdraw from your 401(k), 403(b), and/or IRA without restriction or penalty. However, you will need to pay income taxes on withdrawals unless they are Roth accounts.

Planning this can help ease worries and reduce your risk of overspending. If you need reassurance that your income and cash flow plans are sufficient, meet with a financial advisor.

My wife and I meet or speak with our advisory team often, which has been very comforting in our early retirement phase. Together, you can look at the impact of taxes, evaluate your portfolio diversification, and prepare for the legacy you want to leave your family and others.

Our retirement spending plan is a bit unique. I was fortunate to defer most of my bonuses over my 23 years at Hershey. The annual bonuses were maintained in a T. Rowe Price (TRP) account that was heavily invested in equities over my 20+ years, which resulted in substantial growth.

When I took the early retirement package from Hershey in 2014, ten years ago, I opted for a 5-year delay in starting to draw down this money over a 10-year period. I opted for this delay as I was still teaching full-time at the University of Illinois at Urbana-Champaign.

Thus, this annual drawdown funds almost 70% of our annual spending budget, as discussed above. The remainder is funded through several taxable accounts that we have accumulated in conjunction with our financial advisor.

Once this TRP fund is depleted in 2029, then I will start drawing on several annuities that my wife & I have developed over the years. These annuities were established by converting pensions and other savings plans at both of our employers.


3. When should I claim my Social Security benefits?

Delaying the start of your benefits until age 70 will provide you with a larger monthly payment than if you claim them earlier. But, as I have discussed in prior articles, after considering all their options, some people might decide not to wait. 


If you have a health condition (e.g., cancer, heart disease, etc.) that could limit your life span, for instance, it could make sense to start drawing your Social Security income at an earlier date. Depending upon your situation, drawing this income sooner could help you cover essential expenses during retirement, limiting the need to tap other savings.

As my retirement approached in 2021 after a rewarding career, my wife and I collaborated with our financial advisor to determine our streams of income in retirement.

As 2022 has taught us, inflation can majorly impact our retirement needs. Higher prices combined with greater medical expenses in our older years make it critical to ensure our income and investments can support our longer lives. We will discuss medical or healthcare expenses later in this article.

Since I turned sixty-two in December 2021, I needed to decide whether to start collecting Social Security benefits immediately. We discussed this with our advisor to lay the groundwork years ago when I was age fifty.

We met regularly to discuss current issues (e.g., debt paydown plan) as well as longer-term issues (e.g., 401(k) plans, Social Security, and other retirement vehicles) to ensure we were well-prepared for retirement.

To increase my benefits overall, I chose to delay my Social Security benefits until at least my full retirement age (FRA) at age sixty-six years and ten months, which will occur in 2026.


Other Considerations for Planning a Retirement Drawdown Strategy

In order to develop the appropriate spending or drawdown strategy for your situation, it is strongly recommended that you pull together an estimate of your monthly or annual retirement expenses.

My wife and I used YNAB to develop a “retirement budget” at the onset of our first full year of retirement in 2022. Although you may be able to accurately estimate your entertainment, food, and transportation costs in retirement, health care is the one major outlay that is both unpredictable and expensive.

Fidelity estimates that, on average, a 65-year-old retired couple needs $300,000 to spend on health care over the course of retirement. For planning purposes, you may want to factor in an even higher number because many people experience above-average expenses – often due to chronic illnesses, longevity, or long-term care costs. I recommend exercising and using long-term care insurance policies to help reduce the threat of rising healthcare costs.

Lifestyle is another significant factor to consider in estimating how much you will spend in retirement. You might choose activities that are easy on the wallet, such as spending more time with grandkids, reading (articles on the POF website!), or gardening. But increasingly, people want to tap into their savings to create a more active lifestyle that includes travel, adventure, and new activities.

These decisions have a significant impact on your bottom line. If you are a jet setter planning to see the world or start new activities, expect to increase your income replacement rate significantly. Or if you are looking ahead to enjoying the simple life, this number may be significantly lower.


Final Thoughts

In summary, as you work out a plan for drawing down your retirement income, it is PARTICULARLY important to spend time educating yourself or else work with your financial advisor. You should also talk to a tax advisor to know all your options and take your personal situation into account. 

You can look at the rules of thumb to get a general idea. Still, your situation differs from anyone else, and your differences must be factored into any thoughtful decision of an appropriate drawdown strategy.

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8 thoughts on “My Retirement Drawdown Strategy: Why I Don’t Follow the 4% Rule”

  1. the article leaves out one important task. Review your performance against your budget and revise it as needed. Some expenses will increase and others decrease and the next year’s budget should reflect that.

    • Great point James as reviewing your budget at least annually & making adjustments is a critical task, which I suggested in my prior article called “5 Steps to Reset Your Finances in 2024”. Have a healthy & prosperous 2024!

  2. Subscribe to get more great content like this, an awesome spreadsheet, and more!
  3. This was exactly the advice my now 84-year old father gave after he retired from private practice. Seems to have served him well, as his savings is still in the millions.

  4. Many have discussed the “retirement smile” pattern of spending, as well as Roth conversions. Mix in annuities and newer products like LifeX funds and retirement planning can become quite a bit more complex than the cookie cutter 4% “rule” would suggest.

    • Agreed Topher as many topics in retirement are very complex, which is why I suggest seeking advice from a professional financial (& tax) advisor.

    • Thanks wealthjourneycompass as I’m hoping my strategy leads to a portfolio that is maintained while enjoying the fun experiences of a retirement.


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