How Do You Calculate Withdrawals? A Simple Guide to Making Your Money Last

Have you ever wondered how long your savings will actually last once you start taking money out? Whether you’re planning for retirement or just need to tap into your nest egg, understanding how to calculate withdrawals is super important! I’ve helped many clients figure this out, and trust me—it’s not as complicated as it seems.

What Are Systematic Withdrawals?

Systematic withdrawals are regular, planned withdrawals from your savings or investment accounts. Think of them as giving yourself a regular “paycheck” from your own money. They’re commonly used during retirement, but can be useful anytime you need to live off your savings.

The Basic Formula for Calculating Withdrawals

The simplest way to estimate how long your money will last is to use this formula:

Years = Current Savings ÷ Annual Withdrawal Amount

This assumes no interest or investment growth, which isn’t realistic for most situations. For example, if you have $100,000 and withdraw $10,000 per year, your money would theoretically last 10 years.

But real life is more complicated! We need to account for:

• Investment returns
• Inflation
• Taxes
• Variable withdrawal needs

The 4% Rule: A Starting Point

Many financial advisors suggest the “4% rule” as a starting point. This rule suggests:

1. Withdraw 4% of your initial balance in the first year
2. Adjust that amount for inflation each year afterward
3. This approach is designed to make your money last about 30 years

For example, with $500000 saved

• Year 1: Withdraw $20,000 (4% of $500,000)
• Year 2: If inflation is 2%, withdraw $20,400
• And so on…

But the 4% rule isn’t perfect for everyone! It was developed during specific economic conditions and may not work in all market environments.

Using a Withdrawal Calculator

The easiest way to get a personalized estimate is to use a dedicated calculator. These tools factor in:

• Your current savings balance
• Your desired monthly withdrawal amount
• Expected investment returns
• Inflation rates
• Tax considerations

For instance, the CalcXML calculator lets you input:

• Current savings balance
• Proposed monthly withdrawal amounts
• Annual withdrawal increases (for inflation)
• Annual before-tax return on savings
• Federal marginal tax bracket

Once you input these values, the calculator shows how long your money might last under different scenarios.

Real-World Example Calculation

Let’s walk through a practical example:

Initial savings: $300,000
Monthly withdrawal: $1,500 ($18,000 annually)
Expected annual return: 5%
Inflation adjustment: 2% annually
Tax bracket: 22%

Without investment growth or inflation, money would last 16.7 years ($300,000 ÷ $18,000).

But with returns and inflation factored in:

1. First year withdrawal: $18,000
2. Account earns 5% ($300,000 × 5% = $15,000)
3. Net reduction in year 1: $3,000
4. Next year’s withdrawal increases by 2% to $18,360
5. And so on…

A withdrawal calculator would show this money lasting approximately 25-30 years, depending on market conditions.

Factors That Impact Your Withdrawal Calculations

1. Investment Returns

Higher returns = longer lasting money! But remember, higher returns usually come with higher risk.

Your asset allocation (mix of stocks, bonds, cash) affects your returns dramatically:

• More conservative: Lower returns but more stability
• More aggressive: Potentially higher returns but more volatility

2. Inflation

This is the silent money-killer! Even modest inflation of 2-3% annually will significantly increase your needed withdrawals over time.

Example: $2,000 monthly withdrawal today will need to be $2,693 in 15 years with just 2% annual inflation!

3. Tax Considerations

Different account types have different tax treatments:

• Traditional retirement accounts: Withdrawals taxed as income
• Roth accounts: Tax-free withdrawals (if qualified)
• Taxable accounts: Capital gains taxes on investment growth

Smart withdrawal strategies often use a combination of these account types to minimize taxes.

4. Sequence of Returns Risk

This is a BIG one that many people overlook! The order in which you experience investment returns matters tremendously.

If markets drop significantly early in your withdrawal period, your money might run out much sooner than expected. This is why many advisors recommend keeping 1-2 years of expenses in cash or very conservative investments.

Different Withdrawal Strategies

1. Fixed Dollar Amount

You withdraw the same dollar amount regularly, perhaps adjusted for inflation.

Pros: Predictable income
Cons: No flexibility for market conditions

2. Percentage of Portfolio

You withdraw a fixed percentage of your current balance each year.

Pros: Automatically adjusts to market conditions
Cons: Your income can vary significantly year to year

3. Bucket Strategy

Divide your money into different “buckets” based on when you’ll need it:

• Short-term bucket: 1-2 years of expenses in cash/cash equivalents
• Medium-term bucket: 3-7 years in moderate investments
• Long-term bucket: 8+ years in growth investments

Pros: Provides cushion against market volatility
Cons: More complex to manage

4. Dynamic Withdrawal Strategy

Adjust withdrawals based on market performance—take less when markets are down, more when they’re up.

Pros: Can make money last longer
Cons: Requires flexibility in spending and regular monitoring

Common Mistakes to Avoid

1. Not accounting for inflation – Even modest inflation dramatically reduces purchasing power over time
2. Ignoring taxes – Your withdrawal needs to cover both expenses AND taxes
3. Being too conservative or too aggressive – Either can lead to problems
4. Not considering healthcare costs – These often rise faster than general inflation
5. Forgetting about required minimum distributions (RMDs) – These become mandatory at age 72 for many retirement accounts

Creating Your Own Withdrawal Plan

Step 1: Determine Your Withdrawal Needs

Start by creating a realistic budget for your expenses.

Step 2: Assess Your Resources

Take inventory of all your accounts and income sources (including Social Security, pensions, etc.).

Step 3: Choose a Withdrawal Strategy

Based on your risk tolerance and flexibility needs.

Step 4: Run the Numbers

Use a calculator to see how long your money might last under different scenarios.

Step 5: Create a Monitoring System

Review annually (at minimum) and adjust as needed.

Special Considerations

For Early Retirees

If retiring before 59½, you’ll need strategies to access retirement funds without penalties.

For Conservative Investors

You may need to save more or withdraw less due to lower expected returns.

For Those with Variable Income Needs

Consider a “floor and ceiling” approach—establish a minimum needed income and a maximum you might take in good years.

A Word on Sustainable Withdrawal Rates

What’s sustainable depends on:

• Your time horizon
• Your investment mix
• Current market valuations
• Your flexibility

While the 4% rule is popular, research suggests that:

• For 30+ year retirements, 3-3.5% might be more sustainable
• For shorter time periods, higher rates may work
• Flexible withdrawal strategies generally outperform fixed ones

When to Seek Professional Help

Consider working with a financial advisor if:

• You have a complex tax situation
• You have substantial assets across multiple account types
• You’re unsure about your investment strategy
• You need help balancing competing financial goals

Bottom Line

Calculating withdrawals isn’t just a one-time exercise—it’s an ongoing process that requires regular monitoring and adjustments. By understanding the factors that impact how long your money will last and using the right tools to make informed decisions, you can create a withdrawal strategy that helps meet your financial needs without running out of money too soon.

Remember, the best withdrawal strategy is one that you can stick with through market ups and downs, and that provides both the income you need and the peace of mind you deserve.

Have you started calculating your own withdrawal strategy yet? What questions are you still struggling with? I’d love to hear about your experience in the comments!

At age 73, you are required to withdraw a Required Minimum Distribution (RMD) from your traditional 401(k). The amount is calculated by dividing your account balance on December 31 of the previous year by a life expectancy factor found in the IRS’s Uniform Lifetime Table.

The 2025 RMD (Required Minimum Distribution) formula is: (Account balance on December 31, 2024) / (Life expectancy factor from IRS tables). To calculate, you must find the total balance of your retirement account as of December 31, 2024, and then divide it by your age-based “distribution period” or “life expectancy factor” found in the IRS’s Uniform Lifetime Table.