Retirement Spending Guardrails: How Much Can You Safely Spend?
You’ve worked hard, saved diligently, and now it’s time to enjoy retirement. But one big question stands between you and financial freedom:
How much of your savings can you safely spend each year without running out of money?
That’s where spending guardrails come in. These are simple guidelines that help you enjoy life today without worrying about tomorrow. In this post, we’ll look at two popular rules of thumb—the 4% rule and the 5% rule—and use something called a Monte Carlo simulation to show how each one might play out over a long retirement.
What Is the 4% Rule?
The 4% rule says you can withdraw 4% of your portfolio in the first year of retirement, then increase that amount each year to keep up with inflation.
For example, if you retire with $1,000,000 saved, you’d start by taking out $40,000 in the first year. In year two, you’d give yourself a small raise to account for inflation and keep adjusting from there.
This rule is based on past market performance and was designed to give you a high chance of making your money last 30 years or more.
What About the 5% Rule?
The 5% rule is a little more flexible. Instead of withdrawing 4%, you start with 5%—so that same $1,000,000 portfolio would give you $50,000 in year one.
This idea lines up with the thinking in the book Die With Zero by Bill Perkins. His message is simple: Don’t wait too long to enjoy your money. Spending a little more early on can help you get more out of life while you still have your health and energy.
But that extra spending does come with trade-offs.
What Is a Monte Carlo Simulation?
To understand the risks, we use something called a Monte Carlo simulation.
This tool runs thousands of possible retirement scenarios based on different market conditions, inflation rates, and how long you live. It gives us a success rate, which is the chance that your money will last throughout retirement.
Here’s what the simulation shows:
Withdrawal Rule Chance of Success Over 30 Years
4% Rule About 90%
5% Rule About 75%
Keep in mind, these are general estimates. Your personal results will depend on your investments, lifestyle, healthcare needs, and whether you’re open to adjusting your spending along the way.
So Which One Is Better?
The honest answer is... it depends.
Each approach has its benefits, and the right fit depends on what matters most to you.
The 4% rule is more conservative. It gives you a bigger safety cushion in case the markets hit a rough patch.
The 5% rule gives you more freedom early on. That’s when most people want to travel, explore new hobbies, or spoil the grandkids a little.
If you're open to adjusting your spending during bad market years, the 5% rule can still work. But you’ll need to keep an eye on your portfolio and be willing to make changes when needed.
What Are Spending Guardrails?
Rather than sticking to one number forever, many people use a system of spending guardrails.
Think of them like lane lines on a road. They help keep your spending on track without needing constant course corrections.
Here’s a simple way to do it:
Spend more freely when your portfolio grows above a certain level.
Pull back a little if your portfolio dips below a set floor.
Check in once a year and adjust based on your situation and the market.
This approach gives you room to enjoy life while still protecting your long-term plan.
Final Thoughts
Retirement is your time. Spending guardrails help you make the most of it without second-guessing every financial decision.
Whether you lean toward the 4% rule, the 5% rule, or something in between, what matters most is having a strategy and reviewing it regularly.
And remember, it’s not just about having enough money. It’s about using it well while you still can.
