The 4% Rule: Is It Still A Safe Withdrawal Rate For Retirement?

Shawn Plummer, CRPC

Chartered Retirement Planning Counselor

4% Rule Calculator

Our “4% Rule for Retirement Calculator” is a financial tool designed to help individuals estimate how much they can safely withdraw from their retirement savings each year without the risk of outliving their funds. Based on the widely known 4% rule, this calculator considers the user’s total retirement savings, expected rate of return, inflation rate, and desired retirement duration to provide a reliable withdrawal strategy.

What Is The 4% Rule For Retirement?

The 4 percent rule is a retirement strategy that suggests an individual can withdraw 4% of their initial retirement savings in the first year and adjust this amount for inflation in the following years. Based on historical returns from a diversified stock and bond portfolio, this approach ensures that retirees do not deplete their funds over at least 30 years. It offers a balance between maintaining a steady income and preserving retirement savings.

How Does The 4% Rule Work For Retirement

To implement the four percent rule, retirees first calculate their total retirement savings, encompassing assets like stocks, bonds, mutual funds, and real estate. They withdraw 4% of this amount in the first retirement year. In the following years, withdrawals are adjusted for inflation to maintain purchasing power. For instance, with a 2% inflation rate, they would withdraw 6% (4% base plus 2% for inflation) of the remaining balance in the second year, ensuring their spending keeps up with rising costs.

Why Is There A 4% Rule?

The four percent rule is a retirement guideline that helps retirees figure out a safe amount to withdraw from their investments each year, aiming to provide enough income while minimizing the risk of depleting their funds. It’s based on past market performance and inflation trends, serving as a basic framework for planning retirement finances.

How To Calculate the 4% Rule

  1. To use the 4% rule for retirement, first calculate the total value of your retirement savings, including all investments like 401ks, IRAs, and savings accounts.
  2. Then, apply the 4% rule: multiply your total savings by 0.04 to determine your first-year withdrawal amount.
    • For example, with a $1,000,000 portfolio, you would withdraw $40,000 in the first year. Adjust this amount for inflation each year to preserve your purchasing power, using the Consumer Price Index (CPI) to gauge inflation rates.
  3. Finally, regularly reassess and adjust your strategy to align with changes in your portfolio performance, spending needs, and life circumstances.
How Long Will Money Last Using 4% Rule

4% Rule Examples

Example 1: A Basic Scenario

Consider a retiree with a $1,000,000 portfolio. Applying the 4% rule, they would withdraw $40,000 in the first year. If the inflation rate is 2%, their second-year withdrawal would be $40,800 ($40,000 x 1.02). This process would continue, with the annual withdrawal amount adjusted for inflation.

Example 2: Adjusting for Market Volatility

Suppose the retiree’s portfolio experiences significant market fluctuations, causing the value to drop to $900,000 in the second year. To minimize the risk of depleting their savings, the retiree could adjust their withdrawal rate, perhaps using a 3.5% rule. In this case, their second-year withdrawal would be $31,500 ($900,000 x 0.035).

Example 3: Personalizing the Rule

A retiree with a more conservative investment strategy may have a portfolio with a 40% stock and 60% bond allocation. They might choose a 3.5% withdrawal rate to account for lower expected returns. With a $1,200,000 portfolio, their initial annual withdrawal would be $42,000 ($1,200,000 x 0.035), adjusted for inflation in subsequent years.

4% Rule For Retirement

Is 4% A Safe Withdrawal Rate From Running Out Of Money?

The Impact of Fees With The 4% Rule

Fees can significantly affect the success of the 4 percent rule for retirees. High investment fees or expenses can lower returns and lead to insufficient retirement savings.

  • Example: A retiree has $1 million in savings and pays a 1% fee, that’s $10,000 annually, requiring them to withdraw more than 4% to meet expenses. This diminishes funds for future years. Over decades, even a 1% difference in fees can substantially reduce the total retirement savings.

How Does Inflation Impact The 4% Rule?

Inflation can significantly impact the effectiveness of the four percent rule in sustaining income throughout retirement. This rule allows retirees to withdraw 4% of their portfolio in the first year and then adjust this amount each year for inflation. However, if inflation is higher than expected, the real value of these withdrawals decreases, potentially causing a shortfall in retirement income.

  • Example: A $40,000 withdrawal in the first year would need to increase to $41,200 in the second year with 3% inflation, but with 4% inflation, it would need to be $41,600 to maintain the same purchasing power. If inflation consistently exceeds expectations, retirees might have to modify their withdrawal rates or explore other strategies to sustain their living standards.

Challenges Of Withdrawal Rates

In 2024, Morningstar published a report entitled “Reevaluating the 4% Withdrawal Rule” Its goal was to examine the impact of historically low bond yields on the success rates of different withdrawal rate strategies. Morningstar concluded that withdrawal rates would need to be significantly lower than 4% to have a high probability of success.

What Is The 4 Percent Rule?

A Better Alternative To The 4% Rule

Annuities optimize this shaky retirement withdrawal rule. More importantly, annuities with guaranteed lifetime withdrawal benefits provide higher income payments that are contractually guaranteed to continue paying the owner until they die (even if the account runs out of money).

Will I Run Out Of Money If I Use The 4% Rule For Retirement Withdrawals?

Annuities automate the withdrawal process for your retirement savings. The table below compares the differences between using an annuity to distribute your retirement income versus systematically withdrawing from retirement plans or using the retirement rule through financial advisors.

Withdrawal Rate Comparison

FeaturesAnnuity401kIRA
Withdrawal Percentage5.20% – 6.55%4%4%
Can Income Increase?YesYesYes
Can Income Decrease?NoYesYes
How Long Will Money Last?Lifetime30 Years+30 Years+
Annual Fees0 – 1.50%1% – 4%1% – 4%
TaxationTaxable/Tax-FreeTaxableTaxable/Tax-Free
Death BenefitAccount BalanceAccount BalanceAccount Balance

Example: A 60-year-old retiree starts withdrawing immediately from their $1 million portfolio, they would receive:

  • Annuity: Between $52,000 and $61,000
  • 401k: $40,000
  • IRA: $40,000
  • Roth IRA: $40,000

The 4% Rule vs. Annuities

Feature4% RuleAnnuity Guaranteed Lifetime Withdrawals
Basic ConceptWithdraw 4% of retirement savings annually, adjusting for inflation.Provides a fixed, regular income for life from an annuity.
FlexibilityHigh – Can adjust withdrawals and investment strategy.Low – Payouts and terms are typically fixed upon purchase.
Income PredictabilityVariable – Depends on market performance and withdrawal adjustments.High – Offers predictable, consistent payments.
Market RiskHigh – Subject to market fluctuations.Low – Payments are generally not affected by market changes.
Longevity RiskModerate to High – Risk of outliving assets if withdrawals are too high or market is poor.Low – Provides income for life, reducing the risk of outliving assets.
Inflation AdjustmentYes – Withdrawals can be adjusted for inflation.Varies – Some annuities offer inflation adjustment, others do not.
Initial Investment ControlFull control over investment choices.Limited – Once annuity is purchased, control over the funds is relinquished.
LiquidityHigh – Can access funds but may impact future income.Low to None – Funds are typically locked in the annuity.
Costs and FeesVaries based on investment choices and platforms.Potentially higher – Annuities often come with various fees and charges.
Legacy PlanningAssets can be passed to heirs.Limited – Annuities typically do not leave assets to heirs, though some options may exist.
Tax EfficiencyDepends on account type (e.g., Roth vs. traditional IRAs).Income is taxed as regular income; tax implications depend on annuity type.

This table provides a general overview. Specific details can vary based on the type of annuity and personal circumstances. It’s also important to note that financial strategies can be combined for a more tailored approach to retirement planning. For instance, some retirees use a combination of the 4% rule for a portion of their savings while securing a guaranteed income stream with an annuity for another portion.

Compare The 4% Withdrawal Rule Calculator With Annuities.

If you’re not convinced by the above, use this calculator to compare a 4% withdrawal rate with an annuity lifetime withdrawal rate. These are actual annual withdrawal amounts and not hypothetical estimations. Remember, there is no running out of retirement income with this method.

Note: You can purchase an annuity (with no tax penalties) with your 401k, IRAs, retirement accounts, investments, cash, and retirement savings.

4 Percent Rule Calculator For Retirement

How We Can Help

Retirement planning is complex, and ensuring your savings last requires a comprehensive strategy. At The Annuity Expert, we understand the challenges you face and are here to help you navigate them. With 15 years of experience as an insurance agency, annuity broker, and retirement planner, we are committed to finding the best solutions at the lowest costs.

Your Core Problem

The main issue retirees face is the fear of outliving their savings. This problem is exacerbated by market volatility, inflation, and high fees, which can erode your retirement funds faster than anticipated. The emotional toll of this uncertainty can be significant, causing stress and anxiety about the future.

Our Expertise

We believe in empowering you with the knowledge and tools needed to secure a financially stable retirement. Our expertise ensures that you get personalized, reliable advice tailored to your unique situation. We stand against one-size-fits-all solutions and are dedicated to crafting strategies that work specifically for you.

The 4% Rule For Retirement

What We Recommend

Step 1: Schedule a Free Consultation

Your journey begins with a free consultation with one of our experienced advisors. During this session, we will discuss your current financial situation, retirement goals, and any concerns you may have. The main benefit of this step is gaining clarity on your financial landscape and understanding the potential strategies available to you.

Step 2: Personalized Retirement Plan

We will create a personalized retirement plan tailored to your needs based on the information gathered. Considering your unique circumstances and risk tolerance, this plan will outline the best ways to implement the 4% Rule. The main benefit is having a clear, actionable plan that aligns with your financial goals and provides peace of mind.

Step 3: Ongoing Support and Adjustment

We provide ongoing support to ensure your retirement plan remains effective. This includes regular reviews and adjustments based on market conditions and changes in your personal situation. The main benefit is maintaining financial security throughout your retirement, knowing that your plan is adaptable and responsive to your needs.

Features and Benefits

  • Expert Advice: Personalized strategies from experienced advisors ensure your plan is tailored to your unique needs.
  • Comprehensive Planning: Detailed analysis and planning to maximize your retirement income and minimize risks.
  • Ongoing Support: Regular reviews and adjustments to keep your plan on track and responsive to changes.
  • Cost Efficiency: Solutions designed to minimize fees and maximize returns, ensuring your savings last longer.

Common Objections and Reassurance

Some may worry about the complexity of retirement planning or fear the costs of professional advice. We offer transparent, straightforward guidance and ensure our services are cost-effective, often saving you more money in the long run by optimizing your retirement strategy.

Failing to plan adequately can lead to financial insecurity and the risk of outliving your savings. By working with The Annuity Expert, you can achieve a financially secure and stress-free retirement, enjoying peace of mind and confidence in your financial future.

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Frequently Asked Questions

Does The 4 Percent Rule Still Work?

Many financial experts now believe that the 4% rule may be too high in today’s low-interest-rate environment and that retirees may need to withdraw less to ensure their portfolios last.

Does the 4% rule include Social Security?

No. The 4% rule assumes that your retirement savings are your only source of income. personal finance

How much should I withdraw from my 401k annually?

You can roll a pension into a 401(k) under certain conditions. This process involves transferring the value of your pension into a 401(k) plan, typically when changing jobs or if the pension plan allows for such transfers. This can be a direct rollover, where funds are transferred from the pension plan directly to the 401(k) without incurring taxes. However, it’s important to check the specific pension and 401(k) plan rules, as not all plans allow this type of transfer. Consulting with a financial advisor is recommended to navigate the rollover process effectively.

Shawn Plummer, CRPC

Chartered Retirement Planning Counselor

Shawn Plummer is a Chartered Retirement Planning Counselor, insurance agent, and annuity broker with over 14 years of first-hand experience with annuities and insurance. Since beginning his journey in 2009, he has been pivotal in selling and educating about annuities and insurance products. Still, he has also played an instrumental role in training financial advisors for a prestigious Fortune Global 500 insurance company, Allianz. His insights and expertise have made him a sought-after voice in the industry, leading to features in renowned publications such as Time Magazine, Bloomberg, Entrepreneur, Yahoo! Finance, MSN, SmartAsset, The Simple Dollar, U.S. News and World Report, Women’s Health Magazine, and many more. Shawn’s driving ambition? To simplify retirement planning, he ensures his clients understand their choices and secure the best insurance coverage at unbeatable rates.

The Annuity Expert is an independent online insurance agency servicing consumers across the United States. The goal is to help you take the guesswork out of retirement planning and find the best insurance coverage at the cheapest rates

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