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.

While the 4% rule is a great starting point for your retirement planning, it's flawed as a stand-alone strategy because its simplicity leaves too much room for error. The reality is the market and economy are volatile at times, which creates blind spots that could get retirees in trouble.

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).

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.

Your yearly expenses x 25 = A BIG NUMBER

THEN if I pull no more than 4% of that number out each year to live on in retirement I 'should' preserve the remainder of my investment, it won't deplete, and I won't run out of money.

The 4% rule aims to minimize the risk of failure (running out of money) by being very conservative with spending early in retirement. However, this comes at the cost of potentially underutilizing one's savings and not being able to spend more if investment returns are favorable.

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.

In fact, statistically, just 10% of Americans have saved $1 million or more for retirement. Don't feel like a failure if your nest egg isn't quite up to the seven-figure level. Regardless of your financial position, however, you should strive to save and invest as much as you can.

According to EBRI estimates based on the latest Federal Reserve Survey of Consumer Finances, 3.2% of retirees have over $1 million in their retirement accounts, while just 0.1% have $5 million or more.

What is the Biden retirement rule? ›

“This rule protects the retirement investors from improper investment recommendations and harmful conflicts of interest. Retirement investors can now trust that their investment advice provider is working in their best interest and helping to make unbiased decisions.”

The 4% rule and Social Security

You may be wondering if you should include your future Social Security income in this equation, and the simple answer is, you don't. Think of Social Security as added “security” to your retirement budget.

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?

Housing. Housing expenses—which include mortgage, rent, property tax, insurance, maintenance and repair costs—remained the largest expense for retirees. More specifically, the average retiree household pays an average of $17,454 per year ($1,455 per month) on housing costs, representing over 35% of annual expenditures.

The IRS allows penalty-free withdrawals from retirement accounts after age 59½ and requires withdrawals after age 72. (These are called required minimum distributions, or RMDs). There are some exceptions to these rules for 401(k) plans and other qualified plans.

Summary. If you withdraw $20,000 from the age of 60, $500k will last for over 30 years. Retirement plans, annuities and Social Security benefits should all be considered when planning your future finances. You can retire at 50 with $500k, but it will take a lot of planning and some savvy decision-making.

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.

How the Four Percent Rule was Created. The four percent rule stems from historical data on stock and bond returns over the span of 50 years, between the periods of 1926-1976. Before the 1990s, many individuals believed that 5% was the appropriate benchmark value that retirees should've withdrawn each year.