What Is the 4% Rule?

The 4% rule for retirement budgeting suggests that a retiree should be able to withdraw 4% of the balance in their retirement account(s) in the first year after retiring, and then withdraw the same dollar amount, adjusted for inflation, every yea🍨🦋r thereafter for approximately 30 years.

Since this rule allows for safe withdrawals for about 30 years, this means it may not provide susta🐓inable income for individuals who retire early.

The 4% rule is intended to supply a steady stream of income while maintaining an adequate account balance for future years. Assuming a reasonable rate of 澳洲幸运5开奖号码历史查询:return on investment, the withdrawals will consist prima🥀rily of interest and dividends.

Experts disagree on whether the 4% rule is the best option. Many, including the creator of the rule, say that 5% is a better rule for all but the worst-case scen💯ario. Others caution that 3% is safer.

Understanding the 4% Rule

The 4% rule is a guideline used by some financial planners and retirees to 澳洲幸运5开奖号码历史查ཧ询:💞estimate a comfortable but safe income for retirement.

An individual's 澳洲幸运5开奖号码历史查询:life expectancy plays an important role in determining whether the rate will be sustainable. Retirees who live longer or retire early need their portfolios to last longer, and their 澳洲幸运5开奖号码历史查询:medical costs and other expenses can increase with age.

History of the 4% Rule

The concept of the 4% rule is attributed to Bill Bengen, a financial adviser in Southern California who created it in the mid-1990s. Some people say that the rule has been over-simplified, because he actually said that the 4% rule was based on a "worst-case" scenario and that 5% would be a more realistic number.

The rule was created using historical data on stock and bond returns over the 50-year period 🤪from 1926 to 1976, focusing heavily on the severe market downturns of the 1930s and early 1970s.

Bengen concluded that, even during untenable markets, no historical case existed in which a 4% annual withdrawal rate exhausted a retirement portfolio in fewer than 33 years.

Accounting for Inflation

While some retirees who adhere to the 4% rule keep their withdrawal rate constant, the rule allows retirees to increase the rate to keep pace with inflation. Possible ways to adjust for inflation include setting a flat annual increase of 2% per year, which is the 澳洲幸运5开奖号码历史查询:Federal Reserve's target inflation rate, or adjusting withdrawals based on actual inflation rates. The former method provides steady and predictable increases, while the latter method more effectively matches income to cost-of-living 🃏changes.

Advantages and Disadvantages of the 4% Rule

While following the 4% rule can make it more likely that your retirement savings will last the remainder of your life, it doesn’t guarantee it. The rule is based on the past performance of the markets, so it doesn't necessarily predict the future. What was considered a safe investment strategy in the past may not be a safe investment strategy in the future if market conditions change.

There are several scenarios i🍨n which the 4% rule might not work for a retiree. A severe or protracted market downturn can erode the value of a high-risk investment vehicle much faster than it can a typical retirement portfolio.

Furthermore, the 4% rule does not work unless a retiree remains loyal to it year in and year out. Violating the rule one year to splurge on a major purchase can have severe consequences down the road, as this reduces the principal, which directly impacts the 澳洲幸运5开奖号码历史查询:compound interest that you will depend on for sustainability.

However, there🍨 are obvious benefits to the 4% rule. It is simple to follow and provides for a predictable, steady income. And if it is successful, the 4% rule will protect you from running short of funds in retirement.

The 4% Rule and Economic Crises

According to Michael Kitces, a financial😼 planne🍎r, the 4% rule was developed to take the worst economic situations into account, such as 1929, and has held up well for those who retired during the two most recent financial crises. As Kitces points out:

The 2000 retiree is merely "in line" with the 1929 retiree, and doing better than the rest. And the 2008 retiree—even having started with the global financial crisis out of the gate—is already doing far better than any of these historical scenarios! In other words, while the tech crash and especially the global financial crisis were scary, they still haven’t been the kind of scenarios that spell outright doom for the 4% Rule.

This is, of course, not a reason to go beyond it. Safety is a key element for retirees. So even if following the 4% rule may leave those who retire in calmer economic times "with a huge amount of money left over," Kitces notes, "in general, a 4% withdrawal rate is really quite modest relative to the long-term historical average return of almost 8% on a balanced (60/40) portfolio!"

Meantime, some experts—pointing to the recent low interest rates on bonds and savings—suggest that 3% might be a澳洲幸运5开奖号码历史查询: safer withdrawal rate. The best strategy is to review your situation with a financial planner, starting with 澳洲幸运5开奖号码历史查询:how much you have saved, what your current investments are, and 澳洲幸运5开奖号码历史查询:when you plan to retire.

The Bottom Line

For most people, managing retirement savings is a balancing act. If you withdraw too much too fast, you'll risk running out of money. 澳洲幸运5开奖号码历史查询:Not withdrawing enough money can deny you the full benefit of your hard-ea𒅌rne𝄹d savings.

For those who want a rule of thumb𝔉 to follow, the 4% rule is an imperfect but easy-to-use choice.

Correction—Sept. 24, 2024: This article has been corrected to state that the 4% rule applies to approximately 30-year retirements and may not be sustainable for early retirements with a retirement horizon greater than 30 years.