Does the 4% rule work for today’s retirement? (2024)

FAQs

Does the 4% rule work for today’s retirement? ›

The 4% rule entails withdrawing up to 4% of your retirement in the first year, and subsequently withdrawing based on inflation. Some risks of the 4% rule include whims of the market, life expectancy, and changing tax rates. The rule may not hold up today, and other withdrawal strategies may work better for your needs.

But some financial experts say that the 4% rule may be safe again due to higher bond yields. A financial advisor can objectively analyze your full financial picture and risk tolerance to create a withdrawal and investing approach to balance current income with longevity.

It's a rigid rule.

It also assumes you never have years where you spend more, or less, than the inflation increase. This isn't how most people spend in retirement. Expenses may change from one year to the next, and the amount you spend may change throughout retirement.

Ivanna Hampton: New retirees could kick off their golden years with a familiar number, 4%. A trio of Morningstar researchers analyzed starting safe withdrawal rates from an investment portfolio to fund retirement. The future looks good, and a little flexibility could make it even better.

For most people, managing retirement savings is a balancing act. If they withdraw too much too fast, they'll risk running out of money. Not withdrawing enough money can deny them the full benefit of their hard-earned savings. For those who want a rule of thumb to follow, the 4% Rule is an easy-to-use choice.

Using our portfolio of $400,000 and the 4% withdrawal rate, you could withdraw $16,000 annually from your retirement accounts and expect your money to last for at least 30 years. If, say, your Social Security checks are $2,000 monthly, you'd have a combined annual income in retirement of $40,000.

Retiring at age 65 with $6 million is entirely possible, even for people with quite comfortable lifestyles. Conservative investment and withdrawal plans allow for ample retirement income for most people retiring in those circ*mstances.

The 4% rule entails withdrawing up to 4% of your retirement in the first year, and subsequently withdrawing based on inflation. Some risks of the 4% rule include whims of the market, life expectancy, and changing tax rates. The rule may not hold up today, and other withdrawal strategies may work better for your needs.

In fact, statistically, around 10% of retirees have $1 million or more in savings. The majority of retirees, however, have far less saved. If you're looking to be in the minority but aren't sure how to get started on that savings goal, consider working with a financial advisor. What Does the Average Retiree Have Saved?

What is the golden rule for retirement? ›

Retirement may seem like a distant dream, but it's never too early or too late to start planning. The “golden rule” suggests saving at least 15% of your pre-tax income, but with each individual's financial situation being unique, how can you be sure you're on the right track?

It may be overly cautious.

The 4% rule is meant to be a very conservative approach based on calculations that include some of the worst market downturns in history. For some, this level of caution may not be warranted.

If you want to be sure you're saving enough for retirement, the 25x rule can help. This rule of thumb says investors should have saved 25 times their planned annual expenses by the time they retire, according to brokerage Charles Schwab.

According to the 4% rule, if you retire with $500,000 in assets, you should be able to withdraw $20,000 per year for 30 years or more. Moreover, investing this money in an annuity could provide a guaranteed annual income of $24,688 for those retiring at 55.

In more than 20 U.S. states, a million-dollar nest egg can cover retirees' living expenses for at least 20 years, a new analysis shows. It's worth noting that most Americans are nowhere near having that much money socked away.

Use a Less-Conservative Rate

One criticism of the 4% rule is that, in the vast majority of market conditions, it leaves too much money in a portfolio at the end of a retiree's life. Four percent is a conservative rate that's meant to hold up in even the worst environments.

Adjustments And Alternatives To The 4% Rule

Alternatives include dynamic spending strategies and a reliance on a total return approach rather than a strict withdrawal percentage, adapting to market fluctuations and personal circ*mstances.

Like any basic rule of thumb, this one comes with plenty of qualifications and exceptions, but it can be a useful place to start. Now, 4% of $4 million is $160,000, so as long as you expect your retirement to last for about 30 years and that amount sounds like enough-or more than enough-for you, you're in a good place.