Retirees should consider withdrawing no more than 2.8% of their portfolios each year to reduce the risk of running out of money in retirement, an expert says.

Bridgeway Capital Management CEO John Montgomery takes a more conservative approach to retirement withdrawals than the traditional 4% rule, recommending a 2.8% annual withdrawal rate while keeping 90% of a portfolio in stocks and 10% in bonds, Business Insider reported Friday.

Montgomery Favors a Lower Withdrawal Rate

Montgomery’s strategy combines a lower withdrawal rate with a much higher stock allocation than the traditional retirement portfolio.

“A 90/10 portfolio will produce 6.5% inflation-adjusted returns, while a 60/40 portfolio will deliver 4.8%,” Montgomery told the publication.

The higher stock allocation also brings greater risk. Montgomery said the lower withdrawal rate is designed to provide a cushion against that volatility.

“The 2.8% withdrawal rate from the last major peak allows investors to continue taking that amount out for five consecutive years without changing their lifestyle, as long as stocks do not lose more than 30% of their value,” he said.

Montgomery also sees an opportunity for retirees to increase their spending power when markets rise.

“Stocks advance to new highs in seven out of 10 years, on average,” he said.

His approach is intended to preserve spending throughout retirement while allowing the portfolio to continue growing over time.

Bengen Takes a Different View

Montgomery’s recommendation is notably below the latest guidance from Bill Bengen, the retirement researcher who developed the 4% rule.

Bengen recently raised his recommended starting withdrawal rate to 4.7% and said retirees could potentially spend more than 5% under current conditions. His preferred portfolio also uses a more balanced allocation of 65% stocks, 30% bonds and 5% cash.

Bengen has argued that retirees can become too focused on the possibility of running out of money and end up spending less than they can afford.

“It dominates their philosophy in retirement,” Bengen told Business Insider, referring to that fear. “And therefore, they’ll just simply spend a lot less than they could, which to me is a real shame because they spent all these years saving and sacrificing, and I think they should be able to get the maximum possible out of it.”

The difference between the two approaches comes down to how much risk retirees are willing to accept and how much they want to spend during retirement.

Recent research has also questioned whether the traditional 4% withdrawal rule is the best approach for retirees. A study by American Enterprise Institute senior fellow Mark Warshawsky and independent researcher Gaobo Pang found that combining partial annuitization with delayed Social Security generally produced better retirement outcomes than relying solely on a traditional withdrawal strategy.

Warshawsky said the 4% rule carries “significant risk” of outliving assets for people with typical risk aversion. The researchers found that partially converting retirement savings into guaranteed income while keeping the rest invested provided a balance between income security, flexibility and long-term growth.

Montgomery Wants a Retirement Cushion

Montgomery also takes a different view of the idea that retirees should spend down their savings rather than worry about leaving money behind.

“I’m 70 years old. On an actuarial table, I’ve got 15 more years. My mom is 103. I could live as long as my mom,” Montgomery said.

He also sees value in preserving wealth for family members or charitable causes.

“You can’t take it with you, but you can do awesome things by way of causes in the world, too. I don’t feel bad about that,” he said.

The question of how long retirement savings need to last also makes relying on a single assumption about retirement timing risky. Personal finance expert Suze Orman has warned that treating “I’ll work longer” as a retirement plan can be dangerous because people may be forced to leave the workforce earlier than expected because of health problems, layoffs or caregiving responsibilities.

Orman recommends preparing for the possibility of an earlier retirement by reducing expenses and strengthening savings while still working. She has particularly emphasized paying off a mortgage because eliminating the payment can reduce the amount of income retirees need each month.

Cash Can Protect Retirement Savings

Orman has also advised retirees to keep three to five years of living expenses in cash, giving them a buffer so they do not have to sell investments during a market downturn.

“It’s not always that stocks go down and bonds go up,” Orman said. “Sometimes everything can go down.”

She said the cash reserve can help retirees avoid selling investments when markets are falling, particularly during periods when both stocks and bonds are under pressure.

The strategy is more conservative than the typical guidance of holding one to three years of expenses in cash or near-cash investments. Unlike Montgomery’s approach, which focuses on a lower withdrawal rate to manage portfolio risk, Orman’s recommendation focuses on maintaining enough liquid savings to avoid selling investments during a downturn.

Disclaimer: This content was produced with the help of AI tools and was reviewed and published by Benzinga editors.

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