The 4 Percent Rule – Revisited
“How much of my nest egg can I withdraw each year without running out of money?”
This is a crucial question that retirees often pose to themselves and their financial planners. The fear of outliving one’s savings looms large as retirement approaches.
For many years, the 4% rule has served as a guiding principle for retirement withdrawals. Although it faced skepticism not long ago, it appears to be regaining relevance—albeit with some caveats.
What is the 4% Rule?
The 4% rule suggests that if you withdraw 4% from your retirement accounts in the first year and adjust that amount for inflation in subsequent years, your funds are likely to last for 30 years. This rule was established by financial advisor William P. Bengen in 1994, aimed at providing a safe withdrawal strategy for his clients.
How Does It Work?
Let’s say you have a retirement nest egg of $1 million:
- In the first year, you withdraw $40,000, which is 4% of $1 million.
- In the second year, if inflation is 2%, you would withdraw $40,800 to keep pace with inflation.
- In the third year, if inflation rises to 3%, you would adjust again, withdrawing $42,024 based on the previous year’s amount.
Is a 1990s Withdrawal Strategy Still Relevant?
While some financial advisors previously dismissed the 4% rule as overly conservative, its relevance is making a comeback. Many still find it a useful guideline, particularly for self-directed investors without a financial planner.
According to Morningstar, withdrawal rates have fluctuated between 3.3% and 4% from 2021 to 2024, assuming a balanced portfolio and a 90% probability of success. They note that these figures are conservative estimates and suggest that retirees might consider flexible withdrawal strategies for greater lifetime income.
Craig J. Ferrantino, founder of Craig James Financial Services, believes the 4% rule remains a valuable benchmark. “It’s a straightforward rule that helps people understand how much they can safely withdraw without running out of money,” he explains. However, he acknowledges that it does not account for future taxes and other variables.
But Wait…
Bengen himself cautions that the 4% rule is not universally applicable. In his new book, “A Richer Retirement: Supercharging the 4% Rule to Spend More and Enjoy More,” he emphasizes that the rule was designed for conservative retirees. He has since updated the rule to suggest a withdrawal rate of 4.7% by incorporating a more diverse investment portfolio.
Today, Bengen believes that most retirees can safely withdraw between 5.25% and 5.5% without the fear of depleting their savings.
Who Should Use It and How?
Ferrantino notes that the rule lost popularity during periods of high inflation but is more applicable in times of lower inflation. He uses the 4% rule as a starting point for discussions with clients. For instance, if you withdraw $40,000 from a $1 million nest egg and combine it with $30,000 from Social Security, you could have a total of $70,000, which may be sufficient for many retirees across the country.
“The 4% rule is part of the investment planning vernacular,” Ferrantino adds. “It’s ingrained in people’s minds, and it’s important to remind them of it.”
Don’t Set It and Forget It
Bengen warns that the safe withdrawal rate is unlikely to exceed 5%. He emphasizes that retirement plans should be monitored and adjusted as needed to avoid overspending. “Inflation is the real threat for retirees,” he states, urging individuals to remain vigilant about their financial strategies.
Rodney A. Brooks is an award-winning journalist and author. His retirement columns appear in U.S. News & World Report and Senior Planet.com. He has also written for National Geographic, The Washington Post, and USA TODAY. His book, “The Rise & Fall of the Freedman’s Bank, And Its Lasting Socio-economic Impact on Black America,” was released in 2024. Visit his website at www.rodneyabrooks.com.
Your use of any financial advice is at your sole discretion and risk. Seniorplanet.org and Older Adults Technology Services from AARP make no claim or promise of any result or success.
“How much of my nest egg can I withdraw each year without running out of money?”
This is a crucial question that retirees often pose to themselves and their financial planners. The fear of outliving one’s savings looms large as retirement approaches.
For many years, the 4% rule has served as a guiding principle for retirement withdrawals. Although it faced skepticism not long ago, it appears to be regaining relevance—albeit with some caveats.
What is the 4% Rule?
The 4% rule suggests that if you withdraw 4% from your retirement accounts in the first year and adjust that amount for inflation in subsequent years, your funds are likely to last for 30 years. This rule was established by financial advisor William P. Bengen in 1994, aimed at providing a safe withdrawal strategy for his clients.
How Does It Work?
Let’s say you have a retirement nest egg of $1 million:
- In the first year, you withdraw $40,000, which is 4% of $1 million.
- In the second year, if inflation is 2%, you would withdraw $40,800 to keep pace with inflation.
- In the third year, if inflation rises to 3%, you would adjust again, withdrawing $42,024 based on the previous year’s amount.
Is a 1990s Withdrawal Strategy Still Relevant?
While some financial advisors previously dismissed the 4% rule as overly conservative, its relevance is making a comeback. Many still find it a useful guideline, particularly for self-directed investors without a financial planner.
According to Morningstar, withdrawal rates have fluctuated between 3.3% and 4% from 2021 to 2024, assuming a balanced portfolio and a 90% probability of success. They note that these figures are conservative estimates and suggest that retirees might consider flexible withdrawal strategies for greater lifetime income.
Craig J. Ferrantino, founder of Craig James Financial Services, believes the 4% rule remains a valuable benchmark. “It’s a straightforward rule that helps people understand how much they can safely withdraw without running out of money,” he explains. However, he acknowledges that it does not account for future taxes and other variables.
But Wait…
Bengen himself cautions that the 4% rule is not universally applicable. In his new book, “A Richer Retirement: Supercharging the 4% Rule to Spend More and Enjoy More,” he emphasizes that the rule was designed for conservative retirees. He has since updated the rule to suggest a withdrawal rate of 4.7% by incorporating a more diverse investment portfolio.
Today, Bengen believes that most retirees can safely withdraw between 5.25% and 5.5% without the fear of depleting their savings.
Who Should Use It and How?
Ferrantino notes that the rule lost popularity during periods of high inflation but is more applicable in times of lower inflation. He uses the 4% rule as a starting point for discussions with clients. For instance, if you withdraw $40,000 from a $1 million nest egg and combine it with $30,000 from Social Security, you could have a total of $70,000, which may be sufficient for many retirees across the country.
“The 4% rule is part of the investment planning vernacular,” Ferrantino adds. “It’s ingrained in people’s minds, and it’s important to remind them of it.”
Don’t Set It and Forget It
Bengen warns that the safe withdrawal rate is unlikely to exceed 5%. He emphasizes that retirement plans should be monitored and adjusted as needed to avoid overspending. “Inflation is the real threat for retirees,” he states, urging individuals to remain vigilant about their financial strategies.
Rodney A. Brooks is an award-winning journalist and author. His retirement columns appear in U.S. News & World Report and Senior Planet.com. He has also written for National Geographic, The Washington Post, and USA TODAY. His book, “The Rise & Fall of the Freedman’s Bank, And Its Lasting Socio-economic Impact on Black America,” was released in 2024. Visit his website at www.rodneyabrooks.com.
Your use of any financial advice is at your sole discretion and risk. Seniorplanet.org and Older Adults Technology Services from AARP make no claim or promise of any result or success.
