Can I Retire?

Retirement Savings Reality: Why Average Returns Are Misleading

When someone says "the stock market averages 8% per year," they are telling you a statistically true fact that can produce a catastrophic retirement plan if you take it at face value. The problem is not the average itself. The problem is that retirees do not experience averages. They experience specific sequences of returns, and the order of those returns matters enormously once you start withdrawing money.

This concept, known as sequence of returns risk, is the single most underappreciated danger in retirement planning. It does not appear in most online calculators, and it catches people off guard precisely because they believe the average protects them.

Here is how it works in practice. Retiree A and Retiree B both retire with $1,000,000, both withdraw $50,000 per year, and both experience the exact same set of annual returns over 25 years, producing the same arithmetic average of 8%. The only difference is the order in which those returns appear.

Retiree A gets hit with three bad years right out of the gate: -15%, -12%, and -5% in years one through three, followed by strong recovery years. By year three, her portfolio has dropped to roughly $680,000 while she has been pulling out $50,000 annually. She is now withdrawing from a significantly depleted base, and those early withdrawals during down markets have permanently reduced the portfolio's ability to recover even when the good years arrive. The math compounds against her. By age 78, she is broke.

Retiree B experiences the same returns in reverse order: strong years first, bad years at the end of retirement. His portfolio grows substantially in the early years while he is withdrawing, building a large enough cushion that by the time the bad years arrive near the end, the portfolio can absorb the losses. At age 90, he still has over $800,000 remaining.

Same average return. Same total withdrawals. Same investment options. The only variable was sequencing, and it produced a difference of more than $800,000. This is not an edge case or an academic thought experiment. It is the mathematical reality of how portfolios behave when you are simultaneously drawing income from them.

When you use this retirement simulator, pay close attention to what happens when you reduce expected returns by 1% or 2%, or when you increase your withdrawal amount. Those "what if" scenarios are not abstract exercises. They are your best approximation of how sequence risk might affect your specific plan. Anyone who retires with a single fixed projection and no stress testing is building their retirement on a foundation they have never actually tested. To see exactly how compound growth builds your savings before retirement, try our compound interest calculator - it shows the year-by-year math that feeds into these projections.

The 4% Rule for Retirement Planning: What Bill Bengen Actually Found

The 4% rule is probably the most cited piece of retirement research in existence, and also one of the most widely misunderstood. William Bengen, a financial planner practicing in Southern California, published his findings in the Journal of Financial Planning in October 1994. His research question was deceptively simple: what is the maximum percentage a retiree could withdraw from a balanced portfolio in the first year of retirement, adjust upward for inflation each subsequent year, and never run out of money over a 30-year period?

Bengen analyzed every rolling 30-year retirement period using U.S. stock and bond market data going back to 1926. He assumed a portfolio split 50/50 between large-cap stocks and intermediate-term government bonds, rebalanced annually. His conclusion: a 4% initial withdrawal rate, adjusted each year for actual inflation, survived every single 30-year period in the entire historical record. This included retirements that started right before the Great Depression, the 1973-74 bear market, the 1987 crash, and the stagflation of the 1970s.

The worst 30-year stretch in Bengen's data began in 1966. A retiree starting that year would have faced the brutal 1973-74 bear market (stocks lost over 40%), followed by the high inflation and mediocre stock returns of the late 1970s. Even then, the 4% rule held. The portfolio survived 30 years, but just barely. A 4.1% initial withdrawal would have failed.

Why 4% Might Be Too Generous for Today's Retirees

Bengen's research relied on historical data where bond yields averaged significantly higher than current levels and stock valuations were generally lower relative to earnings. Updated research from Wade Pfau at the American College of Financial Services and others, incorporating current market conditions and global data, suggests that a safer initial withdrawal rate for new retirees may be closer to 3.3% to 3.5%. This is particularly relevant given that the Shiller CAPE ratio for U.S. stocks has been elevated above historical norms for much of the past decade, which has historically correlated with lower subsequent returns.

The 4% rule also assumed a very specific 50/50 stock-to-bond allocation. If you hold 80% stocks, your safe withdrawal rate historically was actually slightly higher (closer to 4.2%) because equities drove more long-term growth over 30-year periods. If you hold only 30% stocks, the safe rate dropped to approximately 3.5% because the bond-heavy portfolio did not generate enough growth to overcome inflation over three decades. Your asset allocation matters as much as the withdrawal rate itself, and the two should be calibrated together.

For practical planning purposes, treat 4% as a reasonable starting benchmark for a 30-year retirement, not as a universal guarantee. If you are retiring before age 60 and need your money to last 40 or 50 years, plan with an initial withdrawal rate of 3.3% to 3.5%. If your portfolio is bond-heavy or you are retiring during a period of elevated stock valuations, consider the lower end of that range. To project what your 401(k) and employer match will grow to by retirement, use our 401(k) calculator. And to evaluate how your current investments have actually performed, try the investment return calculator.

Healthcare: The Retirement Expense Nobody Plans For

According to Fidelity's 2023 Retiree Health Care Cost Estimate, the average 65-year-old couple retiring today will need approximately $315,000 to cover healthcare expenses throughout retirement. That figure accounts for Medicare premiums (Parts B and D), supplemental insurance (Medigap), copays, deductibles, and out-of-pocket prescription drug costs. It assumes both individuals are enrolled in Medicare at 65 and live to average life expectancy.

What that $315,000 estimate does not include is arguably more financially dangerous than what it does:

• Dental care beyond emergency extractions. Medicare does not cover routine dental, and a single implant can cost $3,000 to $6,000.
• Vision care including prescription eyeglasses, contact lenses, and routine eye exams. Medicare covers cataract surgery but not the glasses you need afterward.
• Hearing aids, which range from $2,000 to $7,000 per pair and typically need replacement every five to seven years.
• Long-term care, which is by far the largest potential healthcare expense in retirement and the one most likely to devastate even well-funded retirement plans.

The median annual cost of a private room in a nursing home is approximately $108,000 as of 2023, according to Genworth's Cost of Care Survey. A semi-private room runs about $94,000. The average nursing home stay is 2.4 years, meaning a typical stay could cost between $225,000 and $260,000. None of this is covered by Medicare beyond the first 100 days, and even that limited coverage requires a prior qualifying hospital stay of at least three days.

Should you buy long-term care insurance? The answer depends on where you fall on the wealth spectrum. If your retirement portfolio is between $500,000 and $2 million, long-term care insurance can protect you from catastrophic costs that would otherwise drain your savings and leave your spouse financially vulnerable. If you have less than $300,000 in assets, you may qualify for Medicaid relatively quickly if you need care, though Medicaid facilities offer fewer choices. If you have more than $3 million, you can likely self-insure by setting aside a dedicated pool for potential long-term care needs.

Traditional long-term care policies are expensive, with annual premiums for a 60-year-old couple typically running $3,000 to $7,000 depending on benefit levels and inflation protection. Insurers also have a documented history of raising premiums substantially after policies are issued, which has made many consumers wary. Hybrid life insurance/long-term care policies have grown in popularity because they guarantee a payout regardless of whether the policyholder ever needs long-term care, eliminating the "use it or lose it" concern of traditional policies.

Social Security Timing: The $100,000+ Decision

When to begin claiming Social Security benefits is one of the highest-stakes financial decisions most Americans will ever make. The difference between optimal and suboptimal timing can exceed $100,000 in cumulative lifetime benefits, and in some cases approaches $200,000 for married couples.

Consider a worker who earned an average of $60,000 per year over their career. Their estimated monthly benefit at different claiming ages looks approximately like this:

• Age 62 (earliest eligible age): roughly $1,430 per month ($17,160 per year)
• Age 67 (full retirement age for those born after 1960): roughly $2,040 per month ($24,480 per year)
• Age 70 (maximum delayed credits): roughly $2,530 per month ($30,360 per year)

Claiming at 62 instead of 67 permanently reduces your benefit by approximately 30%. Each year you delay beyond full retirement age increases your benefit by about 8% per year until age 70. The spread between claiming at 62 and waiting to 70 is approximately $1,100 per month, or $13,200 per year, for the rest of your life. Over a 20-year retirement, that annual gap alone totals $264,000 in additional income from delaying.

Break-Even Analysis

The standard way to evaluate this decision is through a break-even calculation. If you claim at 62, you receive smaller checks but collect them for up to eight additional years compared to waiting until 70. At some point, the person who delayed catches up in total cumulative benefits. That break-even point typically falls around age 80 to 82. If you live beyond that age, delaying was the better financial decision. If you pass away before the break-even point, claiming early would have resulted in more total dollars collected.

Given that the average 65-year-old American today has a remaining life expectancy of about 20 years (to age 85), and roughly 25% of 65-year-olds will live past 90, the statistical odds favor delaying for the majority of people. However, statistics describe populations, not individuals. If you have a serious chronic illness, a family history of shorter lifespans, or simply need the income to cover essential expenses, claiming at 62 may be the right and necessary choice for your situation.

Spousal Strategies Worth Considering

Married couples face an additional layer of strategic complexity. When one spouse dies, the surviving spouse inherits the higher of the two Social Security benefits (not both). This means the higher-earning spouse has an especially strong financial incentive to delay claiming until 70, because their larger benefit amount will continue paying out for the lifetime of whichever spouse lives longer. The lower-earning spouse, meanwhile, can often claim earlier at 62 or full retirement age to provide household income during the delay period without significantly reducing the couple's long-term benefit picture.

For a couple where the higher earner's benefit at 70 is $2,530 per month and the lower earner's benefit at 62 is $1,000 per month, the strategy of claiming the smaller benefit early while maximizing the larger one produces more total lifetime income in the vast majority of longevity scenarios.

Building a Withdrawal Strategy That Adapts

The biggest structural flaw in the 4% rule is its rigidity. It assumes you withdraw the exact same inflation-adjusted dollar amount every single year regardless of what the market did. In a year when your portfolio dropped 30%, you withdraw the same amount. In a year when it gained 25%, same amount. No sensible retiree actually behaves this way, and researchers have spent decades developing better approaches.

Three adaptive strategies have emerged as the most practical and well-tested alternatives:

1. The Guardrails Approach (Guyton-Klinger Method)

Developed by financial planner Jonathan Guyton and computer scientist William Klinger, this method establishes upper and lower boundaries around your withdrawal rate and applies automatic adjustments when those boundaries are crossed. You begin with an initial withdrawal rate of approximately 5%, meaningfully higher than the rigid 4% rule, but you follow two non-negotiable rules:

• If strong portfolio growth causes your current withdrawal rate to drop below 4% of the portfolio, give yourself a 10% spending increase
• If poor returns cause your current withdrawal rate to rise above 6% of the portfolio, reduce spending by 10%

Historical backtesting shows that this approach supported initial withdrawal rates between 4.5% and 5.5% with success rates comparable to the rigid 4% rule. The key insight is that building in automatic course correction prevents the runaway portfolio depletion that destroys rigid withdrawal plans during poor market sequences. You spend more during bull markets and tighten up during corrections, which is exactly what most retirees do instinctively anyway.

2. The Bucket Strategy

Rather than managing one large portfolio with a single asset allocation, the bucket strategy divides your retirement savings into three distinct pools organized by time horizon:

• Bucket 1 (covers years 1 through 2): Cash equivalents, high-yield savings, and money market funds. This bucket holds two full years of living expenses, providing an immediate buffer so you never need to sell investments during a market downturn.
• Bucket 2 (covers years 3 through 7): Intermediate-term bonds, Treasury inflation-protected securities, and conservative income-oriented funds. This bucket provides five years of spending and is periodically used to refill Bucket 1 as cash is depleted.
• Bucket 3 (covers years 8 and beyond): Equities, growth-oriented index funds, and other volatile but high-returning assets. This bucket has the longest time horizon and is designed to grow aggressively, periodically refilling Bucket 2 during strong market years.

The psychological advantage of the bucket strategy is difficult to overstate. When the stock market drops 25% in a given year, you know with certainty that you have seven years of living expenses sitting in safe, low-volatility assets. You do not need to sell a single share of stock. You can wait out the recovery with complete confidence, which eliminates the panic selling that destroys so many retirement portfolios.

3. Dynamic Percentage Spending

The simplest adaptive method available: instead of withdrawing a fixed dollar amount adjusted for inflation, withdraw a fixed percentage of your current portfolio value each year. If you set the rate at 4%, you withdraw 4% of whatever the portfolio is worth on January 1st. In a year when your $1,000,000 portfolio grows to $1,200,000, you withdraw $48,000. In a year when it drops to $800,000, you withdraw $32,000.

This approach has one enormous advantage: it is mathematically impossible to run out of money. You can never withdraw more than a percentage of what remains, so the balance never reaches zero. The tradeoff is income volatility. A 30% market decline translates directly into a 30% reduction in that year's withdrawal amount, which requires genuine lifestyle flexibility and a willingness to cut spending during downturns.

No single withdrawal strategy is perfect for every retiree. The guardrails approach balances spending flexibility with long-term sustainability. The bucket strategy provides psychological comfort and structural discipline during market turbulence. Dynamic percentage spending eliminates the mathematical possibility of portfolio depletion but introduces real income uncertainty. Most successful retirees ultimately combine elements from multiple strategies, adjusting their approach as their portfolio value, health situation, and spending needs evolve over a retirement that may span three decades or more.