Determining the annual dollar amount of retirement income and its sources can be different for each retiree. Here are some common methods.
The 4% rule. A retiree withdraws 4% of their total retirement savings in their first year of retirement. Each year, they withdraw the previous year’s amount plus an increase to account for inflation. Note that 4% is a guideline—the retiree may set a different percentage.
Dynamic withdrawal strategy. Annual retirement income is set as a range, with the low and high limits either a percentage of retirement savings or a dollar amount. The retiree withdraws higher amounts when markets perform well and lower amounts when markets are down.
Bucket approach. A retiree’s savings are in three different pools, or buckets. They withdraw retirement income from the first bucket of cash-equivalent investments, safeguarded against market volatility. The second bucket typically holds fixed-income investments. The third, designed for longer-term growth, holds equities. Funds from buckets two and three replenish the first bucket.