A withdrawal rate is the share of an investment balance taken out over a year.
What it means
Divide the year's withdrawal by the account value used for the comparison. The result is a percent.
People use withdrawal rates to test whether savings may support spending. The rate alone cannot promise how long money will last.
A simple example
Taking $40,000 from a $1 million balance equals a 4% withdrawal rate. If the account falls to $800,000 and you still take $40,000, the rate is now 5%. The spending stayed the same, but the pressure on the smaller account increased.
That does not mean you must cut spending every time the market falls. It means the rate should be part of a plan. You might keep some spending flexible, use other income for a while, or decide in advance what would cause a change. A withdrawal rate is a warning light and planning tool—not a guarantee that the money will last.
What people often miss
Taxes and fees may require more money to leave the account than the amount you spend.
Market returns, inflation, age, other income, and changing spending all affect whether a rate works.
Three questions worth asking
- Is the rate based on the starting balance or today's balance?
- Does the withdrawal include taxes and fees?
- What changes after a bad market year?
Checked against primary sources
This explanation was checked against the sources below. Rules and limits can change, so check the source before making a decision.
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