What Is The 4% Rule For Retirement Withdrawals? | Bankrate (2024)

What Is The 4% Rule For Retirement Withdrawals? | Bankrate (1)

Morsa Images/Getty Images

Portions of this article were drafted using an in-house natural language generation platform. The article was reviewed, fact-checked and edited by our editorial staff.

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 The downsides are that it’s a number that might become outdated by the time you reach retirement, and it doesn’t adjust for market conditions, which surely will change year to year.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.

What Is The 4% Rule For Retirement Withdrawals? | Bankrate (2024)

FAQs

What Is The 4% Rule For Retirement Withdrawals? | Bankrate? ›

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.

What is the 4% withdrawal rule example? ›

The 4% rule limits annual withdrawals from your retirement accounts to 4% of the total balance in your first year of retirement. That means if you retire with $1 million saved, you'd take out $40,000. According to the rule, this amount is safe enough that you won't risk running out of money during a 30-year retirement.

How do you calculate 4 percent rule? ›

One frequently used rule of thumb for retirement spending is known as the 4% rule. It's relatively simple: You add up all of your investments, and withdraw 4% of that total during your first year of retirement.

What is the 4% rule the easy answer to how much do I need for retirement? ›

Financial Independence enthusiasts will have the closest-to-correct answer: Take your annual spending, and multiply it by somewhere between 20 and 30. That's your retirement number. If you use the number 25, you're implicitly using a 4% Safe Withdrawal Rate, which is my own personal favorite number.

What is the retirement formula 4%? ›

The basics of the 4% Rule: You take annual income out of your retirement savings starting with 4% of your retirement savings. Income that rises each year with inflation. The assumption is that you're planning for 30 years of retirement.

How long will money last using 4% rule? ›

This rule is based on research finding that if you invested at least 50% of your money in stocks and the rest in bonds, you'd have a strong likelihood of being able to withdraw an inflation-adjusted 4% of your nest egg every year for 30 years (and possibly longer, depending on your investment return over that time).

What is a safe withdrawal rate for a 70 year old? ›

If the individual retires at age 65, that percentage is typically 5% for a single life and 4½% on a joint and survivor basis; the percentages go up to 6% and 5½% if the retirement age is 70.

Does the 4 percent rule include Social Security? ›

Additionally, the 4% rule doesn't consider other income sources such as pensions, Social Security, annuities or part-time work and income. “Consequently, depending on your situation, you may not need a 4% withdrawal rate to generate your desired retirement income,” Fricke notes.

What is the average 401k balance for a 65 year old? ›

$232,710

At what age is 401k withdrawal tax free? ›

Once you reach 59½, you can take distributions from your 401(k) plan without being subject to the 10% penalty. However, that doesn't mean there are no consequences. All withdrawals from your 401(k), even those taken after age 59½, are subject to ordinary income taxes.

Why the 4% rule no longer works for retirees? ›

Withdrawing 4% or less of retirement savings each year has long been a popular rule of thumb for retirees. However, due to high inflation and market volatility, the rule is less reliable now. Retirees will need to decrease their spending and withdrawal rate to 3.3% so they don't run out of money.

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? ›

Average Monthly Retirement 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 is a safe withdrawal rate? ›

Back in 2021, Morningstar concluded that 3.3% was the new safe withdrawal rate, not 4%. That means that retirees could safely withdraw as much as 3.3% as an initial spending rate and still have a 90% probability of success to have more than sufficient funds for a 30-year retirement.

How long will $1 million last in retirement? ›

Around the U.S., a $1 million nest egg can cover an average of 18.9 years worth of living expenses, GoBankingRates found. But where you retire can have a profound impact on how far your money goes, ranging from as a little as 10 years in Hawaii to more than than 20 years in more than a dozen states.

What is an example of withdrawal? ›

Examples of withdrawal in a Sentence

She made a withdrawal from her checking account. He underwent rehab to help him through his withdrawal from heroin. She experienced symptoms of nicotine withdrawal after she quit smoking.

What are examples of withdrawals in accounting? ›

In accounting, “withdrawals” typically refer to the distribution of cash or other assets from a business to its owners or partners. This term is commonly used in the context of sole proprietorships and partnerships, where the business and the owner(s) are not legally separate entities.

What is an example of a cash withdrawal? ›

In front of the 40-year-old baggage handler a woman was withdrawing cash from a bank machine in the terminal building. He was caught after using the woman's bank card to withdraw cash. These are aimed at holidaymakers reluctant to use their bank card to withdraw cash or make payments abroad.

What is an example of early withdrawal? ›

The 10% penalty applies to the entire amount you withdraw from your 401(k). For example, if you withdraw $100,000 from your account before you reach age 59½, you'll pay an early distribution penalty of $10,000.

Top Articles
Latest Posts
Recommended Articles
Article information

Author: Aracelis Kilback

Last Updated:

Views: 5473

Rating: 4.3 / 5 (44 voted)

Reviews: 91% of readers found this page helpful

Author information

Name: Aracelis Kilback

Birthday: 1994-11-22

Address: Apt. 895 30151 Green Plain, Lake Mariela, RI 98141

Phone: +5992291857476

Job: Legal Officer

Hobby: LARPing, role-playing games, Slacklining, Reading, Inline skating, Brazilian jiu-jitsu, Dance

Introduction: My name is Aracelis Kilback, I am a nice, gentle, agreeable, joyous, attractive, combative, gifted person who loves writing and wants to share my knowledge and understanding with you.