Want a higher retirement withdrawal rate than 4%? Here’s what you need to do

Many people work hard to build a retirement nest egg. But then, once their careers actually end, they are disappointed when they realize that they are only able to withdraw a limited amount each year from their IRA or 401(k).

Financial experts promote the 4% rule for managing a retirement nest egg. The rule states that if you withdraw 4% of your IRA or 401(k) account balance in the first year of your retirement and adjust future withdrawals for inflation, your savings should last for 40 years.

That rule makes sense at face value. The problem is that it may not produce the annual income you want.

If you start retirement with a $1 million IRA, which is a lot of money, the 4% rule only gives you $40,000 a year. And while there’s probably some money coming your way from Social Security, it still might not be the amount of annual retirement income you’re hoping for.

The good news is that you may be able to get more income from your savings than the 4% rule allows. But to close big withdrawals, you have to take some risks.

The 4% rule was derived with the assumption that the typical retirement saver would maintain a fairly even mix of stocks and bonds in their portfolio. If you want more annual income from your savings, the answer is simple – take more risk. Go heavy on stocks in your portfolio so that your investments are able to generate higher returns.

If you have a retirement portfolio that is 70% stocks and 30% bonds, you may be able to maintain a 5% withdrawal rate without risking running out of money. If you have 80% of your portfolio in stocks and 20% in bonds, you may be comfortable withdrawing 6% of your balance every year or so.

Of course, this strategy is not without risks. It’s one thing to keep 70% or 80% of your portfolio in stocks when you’re still working and retirement is years away. It is very risky to have that large percentage of your assets in the stock market while you are actively taking retirement plan withdrawals.

This strategy can still work, though, if you have a backup plan in the form of a generous cash reserve. If you always keep enough cash to cover two to three years of living expenses, you’re helping to reduce the risk of investing most of your money in stocks.