Retirement planning? Even multimillionaires can run out of money

Once upon a time in the U.S., not long ago, the “4% rule” was a reasonable (albeit very general) rule of thumb for everyone (including the wealthy) planning their retirement. You probably could expect to spend around 4% of your assets annually and be unlikely to run out of money during the rest of your years. ¹

No longer. The financial planner who devised the “4% rule” has declared it invalid, due to the lower returns and higher inflation all economists now see on the horizon.

We agree. It’s time to toss the 4% rule out the window, as spending that much every year might now lead anyone—yes, even those with great fortunes—to outspend their resources. Many don’t realize that the 4% rule of thumb is inclusive of any funds needed for taxes (i.e. you’re spending less than 4%), leading many to underestimate what they’ll need to support a lifestyle confidently.

That means a burning question remains: How much might we safely spend every year in retirement? Our analysis suggests the new number is likely to be around 3% to 3.5% on an after-tax basis (depending upon complicating factors unique to each individual).

These numbers mean you need to earmark between 30% to 50% more assets to be confident you are setting aside enough to fund your lifestyle in retirement. It also means close attention needs to be paid to assure you’re set up for success. We suggest you:

• Find out what, precisely, your safe spending rate in retirement might be (and how much of your balance sheet you need to align to this goal)
• Set your accounts up so that you can make the most out of all your funds 

Here, we outline why everyone’s new number is likely to be somewhere between 3% and 3.5%; the complicating factors that can push an advisable annual spend rate higher or lower; and strategies designed to wring the most out of the assets you’ll use to fund your retirement.

Why you need to plan now for an annual retirement draw of 3% to 3.5%

Bill Bengen, now himself retired, first devised the 4% rule in 1994 and this rule provided general guidance for many for decades. Essentially his approach suggested that people plan to spend 4% of their assets in the first year of retirement, then adjust that amount annually for inflation. According to Bengen, this method would have kept a retiree from running out of money in every 30-year period since 1926, even during the worst economic times.² 

Based off of J.P. Morgan’s long-term capital market assumptions, economists at J.P. Morgan expect more normalized returns for the foreseeable future. For example, while the S&P 500 earned on average 10% over the last 10 years, our latest assumptions forecast it’ll be slightly lower than that over the next 10 years, coming in just under 8%.³ Of course, we’d rarely recommend an all-equity portfolio to fund a client’s lifestyle goals, but equities usually are a key component in any portfolio. 

Along with modest returns, you also should expect higher levels of inflation, which will reduce the purchasing power of your dollars. Of course, you also should consider taxes and their potential impact on investment gains in taxable accounts and withdrawals from tax-deferred accounts.

The bottom line for retirement spending, as we see it, would look something like this—no matter where on the wealth spectrum you may live:

Based on our analysis and using the assumptions made below, we believe there is a moderate probability that a 60-year-old with a $30MM taxable portfolio would run out of money if she spent 4% of her portfolio (i.e. $1.2MM) for the next 30 years.

Instead, our modeling shows, she’d be wiser to spend between $900K to just over $1MM of her portfolio each year when adjusting her spending for inflation to maintain her purchasing power. Also, the more she spends annually, the more necessary it’ll be for her to invest in equities, which are more likely than most other investments to outpace inflation.

For illustrative purposes only. Source: J.P. Morgan Private Bank as of September 1, 2023.

These spending rates and their associated probabilities of running out of funds are likely to hold generally true whether you have $3 million, $30 million, $300 million—or billions. The only real differences lie in the circumstances of your life.

What’s your number? The answer lies in your details

As helpful as general guidelines might be, each person’s situation (and therefore their advisable retirement spending rate or resulting lifestyle assets needed) is unique.

Yours will be shaped by a variety of factors that can include:

1. Portfolio composition— 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 might need to earmark more to account for that risk so as to avoid jeopardizing your lifestyle. Perhaps you have a lot of embedded gains and will need extra funds to pay taxes when those are eventually sold.
   
   
2. Tax rates—Your U.S. federal, state and local rates can matter, a lot. They certainly need to be taken into account.
   
   
3. Financial commitments—A lower burn rate may be advisable if you have other financial commitments or aspirations beyond maintaining your lifestyle. For example, you may want to support family members outside your home, make a large purchase (such as a family vacation home), fund children’s or grandchildren’s educations, give to charity or engage in some other enterprise that requires financial outlay.
   
   
4. Additional resources—A higher burn rate is probably comfortable if you have other, illiquid assets on your balance sheet (such as a real estate with no debt on it) or perhaps can count on other family resources (trusts or inheritances) to act as a safety net.
   
   
5. Health—Medical expenses, both expected and unexpected, can be a major factor influencing retirement spending and need to be carefully examined and, as much as possible, anticipated. 
   
   
6. Life partners’ ages—Both you and your partner’s ages will factor into the number of years and rate of spending you’ll have in retirement. Very often, the larger a couple’s age difference; the more complicated the planning. Given current life expectancies, for a 65-year-old couple today, there is a 73% probability that at least one will live to age 90; and a 46% chance that person will live to be 95 years old.

Make the most of your retirement funds

With more pressure on your portfolio to last, you’ll want to make sure you’re doing everything to optimize the funds you do have. It becomes that much more important, for example, to:

• Look at where you hold investments (in taxable versus tax-deferred accounts)
• Properly sequence where you pull funds
• Harvest your tax losses
• Deploy integrated planning techniques (such as funding charitable gifts with appreciated stock)
• Use a line of credit to bridge lumpy cash flow so you don’t have to realize gains unnecessarily 

 How we can help you

None of us should retire on general guidelines or hope alone.

Reach out to your J.P. Morgan team so they can help you find your advisable retirement spending rate (using our market insights and proprietary financial forecasting tools), optimize your retirement funds (with the help of our wealth strategists) and make solid plans to achieve your long-term financial goals. 

¹ At least, 4% was a good starting point from which a person might examine their individual circumstances and craft a retirement plan based on personal goals.

²Anne Tergesen, “Cut Your Retirement Spending Now, Says Creator of the 4% Rule,” Wall Street Journal, April 19, 2022.

 ³ J.P. Morgan Asset Management, 2024 Long-Term Capital Market Assumptions