Saving for retirement is important, but knowing how much you can spend each year is the key to making your retirement savings last through 30 years of retirement.

Retirement day is coming, and you plan to be ready by saving an amount of money that will allow you to live the retirement lifestyle of your dreams. Starting what could be a 30-year period of your life with a lump sum of money feels like the freedom you’ve worked for your whole career, but it can present some problems. Once you retire, you suddenly have to change your thinking from saving to spending – but don’t use up that money too fast. It would help to know how much you can spend annually.

Start With the 4% Rule

To understand how much money you can spend each year in retirement, start with the 4% rule. Financial experts used historical data and studied the return rate on stocks and bonds for the 50-year period from 1926 to 1976 to figure out how to advise retiring clients. They concluded that even in the worst economic times, your retirement savings would last at least 30 years if you depleted it by only 4% each year.

According to the 4% rule, if you have $1 million in retirement savings, you can withdraw $40,000 each year. The 4% rule assumes that your retirement savings are invested in a mix of equities and fixed income products. The rate of return you can expect on those investments is similar to rates returned during the 50-year sample time period. Your annual withdrawal should also be adjusted for inflation, assuming the income on your investments will naturally adjust as well.

Most of the calculations for retirement planning are based on unknown or changing variables, so you have to remain flexible in your thinking and reevaluate the plan frequently to be sure you are still on track.

Build In Some Flexibility

Financial planning is speculative in nature. You’re trying to predict what will happen in the future and prepare for it now. Most of the calculations for retirement planning are based on unknown or changing variables, so you have to remain flexible in your thinking and reevaluate the plan frequently to be sure you are still on track. Here are some of the variables to consider when deciding if 4% is the right amount for you.

• Adjust Spending & Investment Mix Year to Year

The 4% rule assumes a rate of return on your investment equal or greater to the historical average. While you can adjust how your investments are distributed between stocks and bonds, you cannot control the return on those investments. Depending on the earnings of your portfolio, you may need to adjust your withdrawals or spending habits from year to year.

• Watch Macroeconomic Conditions & Tax Policy

A sudden jump in inflation or changes to the tax code could seriously affect your retirement income. If your money buys less or you owe more in taxes, you might need to deviate from the 4% rule some years or change it altogether.

• Leverage Other Income

Social Security retirement and pension income are not included in the 4% rule. You may not be old enough to collect Social Security when you first retire, so you may take more than 4% from your retirement savings for the first few years. When you begin collecting Social Security and your pension, you can adjust the amount you withdraw from your retirement investments.

• Watch Expenses

Some years you might have higher medical bills, need to buy a new car, or want to take a trip. In those years you may need to withdraw more than the planned 4% from your retirement savings. You might be able to balance out those extra expenses by taking less than 4% from your savings in years when you don’t have extra costs to cover.

• Consider Longevity

For planning purposes, retirement is considered a 30-year period. While not everyone lives a full 30 years in retirement, it is best to be financially prepared to do so. If you retire early or live longer than 30 years in retirement, you could outlive your savings. If you have reason to believe your retirement will last longer than 30 years, you should adjust the 4% to be sure you don’t run out of money.

Consider the 4% rule a suggestion and use the other variables to adjust the amount up or down as needed. Your plan at the beginning of retirement may change over time as your circumstances dictate. It’s important to remain flexible in planning and reevaluate frequently. For personalized advice on retirement planning, consider talking to a qualified financial advisor.

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