How Much Is Too Much? JPMorgan Warns Against Overdrawing in Retirement

Here's How Much JPMorgan Says You Can Pull From Your Retirement Accounts Yearly
Here's How Much JPMorgan Says You Can Pull From Your Retirement Accounts Yearly
Mike Obel
6 min read

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JPMorgan Chase says ongoing inflation and an outlook for sharply lower returns for investors means that retirees should toss the long-standing 4% rule. That’s the rule that says retirees can safely draw down their savings by 4% per year without having to worry that they’ll run out of funds before they die. Failure to toss this rule could mean having to cut back on your spending or even seeing your savings disappear. Instead the big bank advises drawing down no more than 2% or 3% of your nest egg each year. Consider working with a financial advisor as you plan for a worry-free retirement.

What Is the 4% Rule

The 4% rule was first articulated in 1994 by financial planner Bill Bengen. It calls for spending 4% of your retirement savings in the first year of your retirement and then adjusting that percentage each year for inflation. Doing that would have kept retirees from running out of money in every 30-year period since 1926, even when economic conditions were at their worst, according to Bengen.

For example, a retiree with $1 million in savings would withdraw $40,000 in the first year of his or her retirement. Because all subsequent withdrawals are adjusted for inflation, the same retiree would withdraw $41,200 in their second year of retirement if inflation was 3%.

Why It’s Time to Toss the 4% Rule

Here's How Much JPMorgan Says You Can Pull From Your Retirement Accounts Yearly
Here's How Much JPMorgan Says You Can Pull From Your Retirement Accounts Yearly

Earlier this year, however, Bengen said the 4% rule needs to be tossed. And the reasons for doing so are numerous. For one thing people are living longer. According to the Social Security Administration, the average man turning 65 today can expect to live until age 84.3. His female counterpart can expect to live, on average, until age 86.6. Research has suggested that millennials may live well into their 90s and beyond, so there’s even more pressure to make retirement savings stretch.

The 4% rule also doesn’t take into account individual savings rates. Millennials have the lowest participation rate when it comes to saving in an employer-sponsored plan and a recent report shows that 56% of them are less likely to save for retirement outside of work. That means that a significant number of young workers could come up short in retirement.

JPMorgan also advises retiring the 4% rule because of prospects for lower returns and higher inflation – “that all economists now see on the horizon” – means the 4% rule could be a prescription for serious financial trouble. While the S&P 500 earned on average 10% over the last 10 years, the bank’s recently published long-term capital market assumptions forecast a 60/40 portfolio returning just 4.3%.

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