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Within the vast topic of retirement, the concept of “the 4% rule” hits right at the core of most people’s concerns: how much money is enough money to have in your savings when you finally reach retirement?
There’s no shortage of advice about how much you should save for retirement, but there’s a lot less clarity around how much money you’ll ultimately need to withdrawal when the time comes. This is what the 4% rule addresses.
What is the 4% rule?
The 4% rule is a popular retirement withdrawal strategy that suggests retirees can safely withdraw the amount equal to 4% of their savings during the year they retire and then adjust for inflation each subsequent year for 30 years.
The 4% rule is a simple rule of thumb as opposed to a hard and fast rule for retirement income. Many factors influence the safe withdrawal rate such as risk tolerance, tax rates, the tax status of your portfolio (i.e., the ratio of tax-deferred assets to taxable assets to tax-free assets) and inflation, among others.
The upside to this go-to rule is its simplicity. Having a guideline for retirement spending that’s clean and simple makes planning much easier. The downsides are that it’s a number that might become outdated by the time you reach retirement, and it doesn’t adjust for market conditions, which surely will change year to year.
Let’s dig into the 4% rule a bit more — and unpack whether or not it might be a helpful guideline for your own retirement planning or whether it’s ill-equipped for the dynamic set of factors that rule over long-term savings and future spending.
History of the 4% rule
In 1994, using historical data on stock and bond returns over a 50-year period — 1926 to 1976 — financial advisor William Bengen challenged the prevailing narrative that withdrawing 5% yearly in retirement was a safe bet.
Based on a deep dive into the half century of market data, Bergen concluded that essentially any conceivable economic scenario (even the more tumultuous ones) would allow for a 4% withdrawal during the year they retire and then they’d adjust for inflation each subsequent year for 30 years.
Bengen used a 60/40 portfolio model (60% stocks , 40% bonds) and was conducted during a period of higher bond returns (higher interest rates) compared with current rates.
What the 4% rule doesn’t account for
Not to dismiss the diligent work of Bengen and the financial community that supported his conclusion, but, as with all pieces of conventional wisdom, the 4% rule doesn’t account for countless variables in each person’s individual situation. This is not so much the result of a failing in the rule itself, or the math that backs it up, but an inherent failing of attaching any firm, flat rule to governing long-term financial planning, given that the economic landscape over the long term is anything but flat and firm.
Here are a few factors that opting for a set-it-and-forget-it 4% flat withdrawal rate in retirement doesn’t include:
- Medical expenses: Most of us will encounter them as we get older, especially in the golden years of retirement, but exactly what kind of medical expenses you’ll incur is practically impossible to predict. Some are also exponentially more costly than others. The other big variable that impacts the viability of the 4% rule: life expectancy. Needless to say, the longer you live, the longer you’ll need your savings to last.
- Market fluctuations: The economy is unlikely to stay perfectly consistent and even-keeled for the entirety of your retirement years. In a booming economic environment, withdrawing more than 4% annually might be perfectly fine; in more uncertain times, you might need to pull back your spending a bit. Unfortunately, there’s no prescriptive, guiding rule for financial management that beats simply keeping an eye on your money and acting accordingly at any given time.
- Personal tax rate: Another major unknown is your personal tax rate, which is affected by a number of factors including the types of investment accounts you have, the size of those accounts and your other income, deductions, credits and what state you live in.
Should you use the 4% rule?
So do these personal — and in some cases, wholly unknowable — details of our financial futures render the 4% rule useless? Not at all. It just needs to be adapted to your specific situation.
And that’s really the point, both of the 4% rule and any other financial rules of thumb: It’s less of a hard-and-fast mandate on what to do and more of a well-informed starting place, from which your own personal retirement savings and spending plan can be thoughtfully crafted. It doesn’t solve everything you need to consider about retirement finances, but many people consider it a very useful frame of reference to jump off from.
That said, the applicability of the 4% rule also depends on where your retirement assets are invested. If you’re primarily saving for retirement somewhere other than a portfolio of mostly stocks and bonds, the 4% rule is less likely to apply to your holdings. And even then, depending on the allocation between stocks and bonds, 4% might not be the right figure for your portfolio. Or it might be fitting today, but not 20 or 30 years from now. In any case, it’s between you and your financial advisor to figure out what projected withdrawal rate makes the most sense.
Bottom line
While the 4% rule can provide a helpful starting point for retirement planning, it’s not a one-size-fits-all solution. Factors such as market fluctuations, medical expenses and personal tax rates must be considered when determining a safe withdrawal rate. Consulting with a financial advisor can help you make the best decisions for your future financial stability. Remember, the 4% rule is just a guideline, not a definitive answer, and it is up to you to tailor it to your specific needs.
FAQs
The 4 percent rule refers to withdrawing 4 percent of your portfolio's balance the first year of retirement, using the portfolio's balance when you retire to calculate your withdrawals. Then your withdrawals are adjusted by the rate of inflation in subsequent years throughout retirement.
How to calculate the 4% rule? ›
4% rule calculation. Start by adding up all your investments, retirement accounts, and residual income. Calculate 4% of that total, and that's the budget for your first year of retirement. After each year, you adjust for inflation.
Why does the 4% rule no longer work for retirees? ›
The 4% rule comes with a major caveat: It's not really a “rule” since everyone's situation is different. If you have a large retirement investment portfolio, you might not need to spend 4% of it every year. If you have limited savings, 4% might not come close to covering your needs.
How long will money last using the 4 rule? ›
This rule aims to provide retirees high confidence that they won't outlive their savings for 30 years. Though popular, it has faced criticism in recent years due to forecasts for lower returns on investments. But some financial experts say that the 4% rule may be safe again due to higher bond yields.
What is the 4 rule and safe withdrawal rates in retirement? ›
The 4% Rule is intended to make your retirement savings last for 30 years or more. This rate of withdrawals means that most of the money used will be the interest and gains on investments, not principal, assuming a reasonably healthy market return.
What is the $1000 a month rule for retirement? ›
One example is the $1,000/month rule. Created by Wes Moss, a Certified Financial Planner, this strategy helps individuals visualize how much savings they should have in retirement. According to Moss, you should plan to have $240,000 saved for every $1,000 of disposable income in retirement.
What is a safe withdrawal rate for a 70 year old? ›
Description: The 4% rule suggests that retirees can safely withdraw 4% of their retirement portfolio balance each year without depleting their savings over a 30-year period. Rationale: This rule is based on historical market performance and assumes a balanced portfolio of stocks and bonds.
What percentage of retirees have $2 million dollars? ›
According to EBRI estimates based on the latest Federal Reserve Survey of Consumer Finances, 3.2% of retirees have over $1 million in their retirement accounts, while just 0.1% have $5 million or more.
How much does Suze Orman say you need to retire? ›
Famed financial guru Suze Orman once told Paula Pant on the “Afford Anything” podcast that $2 million simply isn't enough to retire early on. So, how much does she say you will need to live comfortably in your golden years? She advocates saving significantly more — closer to $5 or $10 million in order to retire early.
What is the Biden retirement rule? ›
“This rule protects the retirement investors from improper investment recommendations and harmful conflicts of interest. Retirement investors can now trust that their investment advice provider is working in their best interest and helping to make unbiased decisions.”
The IRS allows penalty-free withdrawals from retirement accounts after age 59½ and requires withdrawals after age 72. (These are called required minimum distributions, or RMDs). There are some exceptions to these rules for 401(k) plans and other qualified plans.
Which is the biggest expense for most retirees? ›
Housing—which includes mortgage, rent, property tax, insurance, maintenance and repair costs—is the largest expense for retirees. More specifically, the average retiree household pays an average of $17,472 per year ($1,456 per month) on housing expenses, representing almost 35% of annual expenditures.
What is a good monthly retirement income? ›
Many retirees fall far short of that amount, but their savings may be supplemented with other forms of income. According to data from the BLS, average 2022 incomes after taxes were as follows for older households: 65-74 years: $63,187 per year or $5,266 per month. 75 and older: $47,928 per year or $3,994 per month.
What are the flaws of the 4% rule? ›
The biggest problem with the 4% rule is that life is almost never as simple as we'd all hope. There may be some years in retirement that you need more than the rule allows and some years that you need less. This could be caused by moving locations, health problems, or other life changes.
How many people have $1,000,000 in retirement savings? ›
In fact, statistically, around 10% of retirees have $1 million or more in savings. The majority of retirees, however, have far less saved.
Does the 4% withdrawal rule for retirees still make sense? ›
Late last year, research firm Morningstar affirmed 4% as the safe withdrawal rate, up from 3.8% in 2022 and 3.3% in 2021. The rule was developed in 1994 by financial planner Bill Bengen, who researched historical market conditions and found that a 4% withdrawal rate worked across all of them.
What is a realistic retirement withdrawal rate? ›
We did the math—looking at history and simulating many potential outcomes—and landed on this: For a high degree of confidence that you can cover a consistent amount of expenses in retirement (i.e., it should work 90% of the time), aim to withdraw no more than 4% to 5% of your savings in the first year of retirement, ...
Can you live on $3,000 a month in retirement? ›
Top the amount with 401(k) savings, living on $3,000 a month after taxes is possible for a retiree. For those who only have social security benefits to rely on, there are many places where they can retire on their checks both in the USA and around the world.
Is $2,000 a month enough to retire on? ›
Retiring on a fixed income can seem daunting, but with some planning and commitment to a frugal lifestyle, it's possible to retire comfortably on $2,000 a month. This takes discipline but ultimately will allow you to have more freedom and happiness in your golden years without money worries.
Can you retire at 60 with $300 000? ›
If you've managed to save $300k successfully, there's a good chance you'll be able to retire comfortably, though you will have to make some compromises and consider your plans carefully if you want to make that your final figure.
You have $100,000 saved at retirement. You take $4,000 per year of income for each $100,000 you have (that's 4% of $100,000). If you have $500,000 saved for retirement, that's $20,000 of annual income from your investments. If you have $1 million, that's $40,000 per year.
What is the 4% rule for 500000? ›
That 4% number assumes it's 4% of your starting portfolio. So, you have a $500,000 portfolio, so 4% of that is $20,000 and you would spend that in year one. The next year you would spend the same amount adjusted by inflation. So, like as with Social Security, it would go up by the rate of inflation.
How long will $400,000 last in retirement? ›
This money will need to last around 40 years to comfortably ensure that you won't outlive your savings. This means you can probably boost your total withdrawals (principal and yield) to around $20,000 per year. This will give you a pre-tax income of almost $36,000 per year.
What is the 4 percent rule in math? ›
100% divided by 4% is 25. You will need to have 25 times your annual expenses saved to safely withdraw 4% of the balance each year. Using the example above, someone with annual expenses of $60,000 will need $1,500,000 to be reasonably confident they can withdraw $60,000 each year and never run out of money.
