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

Shawn Plummer

CEO, The Annuity Expert

As pensions have continued to be a less common source of retirement income, it has become necessary to develop alternative retirement income approaches. Ask 100 people how much income your retirement nest egg can generate in retirement, and you will get 100 different answers. However, while there are different strategies and approaches, one rule of thumb is usually the basis from which all others are built: the 4% Withdrawal Rule.

But is Bengen’s 4% safe withdrawal rate still safe?

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What Is The 4% Rule For Retirement?

The 4 percent rule is a guideline used to determine how much money an individual can withdraw from their retirement savings each year without running out of money during their retirement.

The rule suggests that retirees can safely withdraw 4% of their initial retirement savings balance in the first year of retirement and adjust that amount for inflation in subsequent years. This guideline is based on historical stock and bond market returns, assuming a well-diversified portfolio. It is meant to provide reasonable confidence that the retiree’s savings will last at least 30 years.

How Long Will Money Last Using 4% Rule

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

How the 4% Rule Works

To apply the four percent, retirees calculate their total retirement savings, including investments such as stocks, bonds, mutual funds, and other assets like savings accounts and real estate. They then take 4% of this initial retirement savings balance and withdraw that amount in the first year of retirement.

In subsequent years, retiree adjusts their withdrawals to account for inflation, meaning they increase their withdrawal amount to keep pace with rising prices. For example, if inflation is 2%, the retiree would withdraw 4% plus 2%, or 6% of their remaining retirement savings balance, in the second year.

Safe Withdrawal Rate

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.

How To Calculate the 4% Rule

Determine Your Retirement Portfolio Value

To calculate the 4% rule, start by determining the total value of your retirement savings. This should include all investments, such as 401ks, IRAs, and other savings accounts.

Apply the 4% Rule

Once you have your total retirement portfolio value, multiply it by 0.04 (4%) to find your initial annual withdrawal amount. For example, if your retirement savings are worth $1,000,000, your first-year withdrawal would be $40,000.

Adjust for Inflation

Adjust your withdrawal amount for inflation each year to maintain your spending power. You can use the Consumer Price Index (CPI) as a guide to estimate annual inflation rates. For instance, if the inflation rate is 2%, you would increase your annual withdrawal by 2% the following year.

Reassess and Adjust Regularly

It’s essential to reassess your retirement strategy and regularly adjust as needed. Monitor your portfolio performance, spending habits, and life circumstances to ensure the 4% rule suits your needs.

Why Is There A 4% Rule?

The four percent rule in retirement was created as a guideline for retirees to determine a sustainable withdrawal rate from their investment portfolios, balancing the need for income with the risk of running out of money during retirement. It is based on historical market returns and inflation rates and is intended to provide a framework for retirement planning.

The Impact of Fees With The 4% Rule

Fees can significantly impact the sustainability of a retiree’s savings when applying the 4 percent rule. For example, if the retiree is paying high investment fees or expenses, it could reduce their overall return and potentially lead to a shortfall in their retirement savings.

For example, if a retiree has a $1 million retirement savings balance and is paying a 1% investment fee, they would be charged $10,000 in fees each year. This means they would need to withdraw more than the four percent guideline to cover their expenses, reducing the money available for future years.

Over time, high fees can compound and significantly impact a retiree’s savings. Even a difference of 1% in fees can potentially result in a significant reduction in the total amount of money available for retirement over several decades.

How To Invest In Your Portfolio With The 4 Percent Rule

To invest in a portfolio with the 4 percent rule, you can follow these steps:

  • Determine your initial retirement savings balance: This may include a variety of investments such as stocks, bonds, mutual funds, and other assets.
  • Decide on your asset allocation: The 4 percent rule assumes a well-diversified portfolio of stocks and bonds, so you’ll want to choose a mix of these assets that aligns with your investment goals, risk tolerance, and time horizon.
  • Calculate your annual withdrawal amount: The 4 percent rule suggests withdrawing four percent of your initial retirement savings balance in the first year of retirement and adjusting that amount for inflation in subsequent years. So, for example, if you have $500,000 in retirement savings, you would withdraw $20,000 in the first year of retirement.
  • Monitor your portfolio’s performance: Keep an eye on your portfolio’s returns and adjust your withdrawal rate if needed. If your portfolio is performing well, you may be able to increase your withdrawal rate. Conversely, if it’s not performing as expected, you may need to decrease your withdrawal rate to ensure your savings last throughout retirement.
  • Consider the impact of fees: High investment fees can eat into your returns and potentially reduce the sustainability of your retirement savings. Try to keep fees as low as possible by choosing low-cost investments such as index or exchange-traded funds.
4 Percent Rule

How does inflation impact the 4% rule?

Inflation can significantly impact the four percent and a retirement portfolio’s ability to sustain income over time. This is because the four percent assumes that retirees can withdraw 4% of their portfolio balance in the first year of retirement and then adjust that withdrawal amount each subsequent year for inflation. However, if inflation is higher than anticipated, the purchasing power of those withdrawals may decrease over time, potentially leading to a shortfall in retirement income.

For example, if a retiree withdraws $40,000 in the first year of retirement, and inflation averages 3% per year, they would need to withdraw $41,200 in the second year to maintain the same purchasing power. However, if inflation averages 4% annually, they must withdraw $41,600 in the second year to maintain the same purchasing power. If inflation continues to be higher than anticipated, retirees may need to adjust their withdrawal rate or seek alternative strategies to maintain their desired standard of living.

Challenges of Withdrawal Rates

In 2013, Morningstar published a report entitled “Low Bond Yields and Safe Portfolio Withdrawal Rates.” 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.

Alternatives to The 4 Percent Rule

Fixed index annuities (FIAs) may be one potential solution to address lower withdrawal rates. FIAs and annuities generally can provide more guaranteed income than a pure withdrawal rate strategy. 

FIAs are designed to be long-term vehicles that offer income benefit riders, which may be offered built-in or, for an additional cost, can provide retirees with lifetime income.

The 4% Rule vs. Annuities

How to calculate the 4% rule

The 4% rule is a retirement income strategy that involves withdrawing 4% of your initial retirement portfolio annually, adjusted for inflation, providing income for at least 30 years. It offers flexibility and potential for growth.

Comparing Annuities With The 4% Rule

On the other hand, annuities with guaranteed lifetime income riders are insurance products that provide a guaranteed income stream for life, regardless of market performance or the account balance. In addition, these annuities offer increased income security and protection from outliving your assets.

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

How Long Will My Money Last Using The 4% Rule?

The 4% rule is designed to make your money last for at least 30 years in retirement. By withdrawing 4% of your initial retirement portfolio annually, adjusted for inflation, you can maintain a steady income without depleting your savings too quickly. However, the rule is based on assumptions and historical market data so that individual experiences may vary. Therefore, it’s essential to monitor your portfolio, spending habits, and market conditions and make adjustments to ensure your money lasts throughout your retirement.

Retirement Withdrawal Rate

4% Rule Calculator

As people live longer and healthier lives, retirement is no longer the brief respite from work it once was. Instead, for many people, retirement lasts 20 years or more. Given this new reality, planning for retirement withdrawals is more critical than ever.

One of the best ways to efficient retirement spending is with an annuity. An annuity insurance policy will give you a guaranteed fixed income for the rest of your life, so you don’t have to worry about running out of money in retirement. An annuity can earn interest on your retirement plan without the risk of market volatility while collecting income. If you have any remaining balances when you die, they will be passed down to your beneficiaries as a death benefit. To see if this drawdown rule applies to you, use our safe withdrawal rate calculator to compare investment outcomes.

Safe Withdrawal Rate Comparison

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 yourself or through financial advisors using the retirement rule.

FeaturesAnnuity401kIRARoth IRA
Withdrawal Percentage5.20% – 6.55%4%4%4%
Can Income Increase?YesYesYesYes
Can Income Decrease?NoYesYesYes
How Long Will Money Last?Lifetime30 Years+30 Years+30 Years+
Annual Fees0 – 1.50%1% – 4%1% – 4%1% – 4%
Death BenefitAccount BalanceAccount 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

Next Steps

In summary, the four percent rule is a popular guideline that suggests retirees can safely withdraw 4% of their retirement balance each year without fear of running out of money. This can be an effective method to start your financial planning, but it shouldn’t be your only tool. Interest rates, inflation, and other market changes should always be considered when calculating retirement withdrawals. For more information on retirement planning, check out our free resources or request a free quote today!

4% Rule

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Frequently Asked Questions

How long will the money last using the 4% rule?

The 4% rule is a popular rule of thumb used to estimate how long retirement savings will last. It states that withdrawing and spending 4% of total portfolio value yearly should be enough to sustain an individual’s lifestyle without running out of money. Of course, the exact duration depends on the size of your retirement portfolio, but as a general guideline, if you withdraw 4% per year, you may have enough money to last for 25 years.

What is a safe withdrawal rate in retirement?

A safe withdrawal rate in retirement allows you to preserve your principal or original capital and still be able to withdraw an income from your investments. Generally, a safe withdrawal rate can range from 4% to 5% of your total investment portfolio. However, it is essential to note that this number could vary depending on your situation and financial goals.

What is the 4% rule for retirement?

The 4% rule is a popular retirement-saving rule that suggests withdrawing and spending 4% of your total portfolio value annually. This should be enough to sustain an individual’s lifestyle without running out of money. However, it is essential to remember that the exact duration and success of this strategy will depend on the size of your retirement portfolio, so it should be tailored to fit your unique needs.

How Long Will Money Last Using The 4% Rule?

How long your money will last using the 4% rule depends on the size of your retirement portfolio, the withdrawal rate you choose, and the inflation rate. For example, if you have a $500,000 retirement portfolio and withdraw 4% ($20,000) in the first year of retirement, and the inflation rate is 2%, your withdrawal rate will increase to 4.2% next year.
The rule of thumb is that using a 4% withdrawal rate, the money should last 25 years. However, it’s important to note that this is a rough estimate, and actual results may vary based on your investments’ performance, inflation changes, and other factors.

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.

How does the 4% rule work for retirement?

Based on historical data, the 4% retirement rule advises withdrawing 4% of an investment portfolio annually for retirement income over 30 years.

How does the likelihood of different investment outcomes impact the effectiveness of the four percent rule for retirement?

The 4 rule assumes a steady rate of return on investments. If the likelihood of different investment outcomes changes, the rule’s effectiveness can be compromised. For example, if there is a market downturn or low interest rates, the 4 rule may not provide sufficient income for retirement.

How does investing in actively managed mutual funds affect the success of the four percent rule?

The impact of investing in actively managed mutual funds on the success of the four rules can include higher fees and potentially lower returns, which may decrease the portfolio’s sustainability over time.

How much do I need to retire based on the four percent rule?

A person typically must accumulate a portfolio worth 25 times their desired annual retirement income based on the four percent.

What role do retirement accounts play in implementing the four percent rule for retirement?

Retirement accounts play a significant role in implementing the four percent as they can provide tax advantages and potentially increase the sustainability of withdrawals.

How does the initial portfolio value impact the four percent rule for retirement?

The initial portfolio value impacts the four percent rule for retirement by determining the dollar amount of the annual withdrawal.

How does the 4% rule reflect actual investment results over time?

The 4% rule assumes consistent investment returns, but results may vary.

How does the performance of stock and bond returns affect the 4% rule?

The performance of stocks and bonds can impact the success of the 4% rule in retirement.

How can the value and composition of retirement assets impact the success of the 4% rule?

The value and composition of retirement assets can impact the success of the 4% rule by affecting the overall investment returns and risk exposure of the portfolio.

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 does the 4% retirement rule impact personal finance decisions?

The 4% retirement rule affects personal finance decisions regarding retirement withdrawal rates.

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Shawn Plummer

CEO, The Annuity Expert

I’m a licensed financial professional focusing on annuities and insurance for more than a decade. My former role was training financial advisors, including for a Fortune Global 500 insurance company. I’ve been featured in Time Magazine, Yahoo! Finance, MSN, SmartAsset, Entrepreneur, Bloomberg, The Simple Dollar, U.S. News and World Report, and Women’s Health Magazine.

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

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