How Much Can You Safely Withdraw From Your Retirement Account Each Year?

Throughout your life, you need to put money into investment accounts for retirement. Otherwise, you could find yourself with too little to live on as a senior. Social Security will only replace about 40% of your pre-retirement earnings.

To determine how big your nest egg needs to be, you'll have to decide how much you can safely withdraw from it each year. After all, you can't take too much out too fast or you'll run out of money. Setting your withdrawal rate enables you to figure out how much income your account will produce without draining it dry -- and to find out if it's enough or if you need to save more.

But how can you determine your withdrawal rate? Here are a couple of options to figure out how much money you can take out of your retirement accounts each year and transfer to your checking account to pay your bills and cover living expenses.

Follow the 4% rule

The 4% rule is one rule of thumb many people follow. With this rule, you plan to withdraw 4% of your account balance when you retire. If you have $900,000 invested, you could take out $36,000 for the first year. In subsequent years, you would simply adjust this amount upward to account for inflation.

There are some downsides to the 4% rule. First, it's rigid and doesn't account for changing spending habits or changing market conditions. Second, and perhaps more importantly, market volatility and high inflation mean that following this rule may no longer be sufficient to ensure you don't run out of money.

Morningstar research shows that withdrawing around 3.8% would be a better bet in today's environment, so if you're going to follow a percentage-based rule and you want to be conservative about making sure your money lasts, that may be the way to go.

But if you are pretty confident in your investments, don't think you'll far outlive your life expectancy, and aren't worried about running out of money late in retirement, then sticking with the standard 4% rule could be OK.

Use IRS minimum distribution tables

There's another option you could use, and it's recommended by the Center for Retirement Research (CRR) at Boston College. The CRR recommends using required minimum distribution (RMD) tables made by the IRS to set the right withdrawal rate.

RMDs are required for some tax-advantaged accounts like traditional IRAs and 401(k)s. Basically, you eventually have to start taking money out at age 72 or age 73 (depending on birth year) if you have these accounts. The IRS has made a table to tell you how much.

But even if you aren't subject to RMD rules, you may still want to use these tables to dictate your withdrawal rate. That's because they are dynamic and change with market conditions. Plus, it's easy to use the tables to determine how much to take out, and you may be less likely to run out of money if you stick with the guidelines.

The downside is, you'd need to check these tables regularly to see how much to take out of your account in a given year. But that's a small price to pay for increasing the chances of a secure retirement, so you'll want to at least consider this option when deciding how best to collect the right amount of income from your retirement plans.

The right option for you will depend on how conservative you want to be with ensuring your retirement savings lasts, so take the time to make an informed choice on this issue. You can also talk with a financial advisor if you need help making this choice, but be sure to find a fee-only financial advisor and find out upfront exactly how much they'll charge for their services. With the right research or help from the right professional, you can make a choice that's right for you.