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

FAQs

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

While it's not guaranteed, multiple studies of the 4% rule show that there is near certainty that if you follow it your retirement savings will last for at least 30 years. Of course, this is based on what the stock market has done in the past and not necessarily on what it will do – no one can predict that.

The 4% rule comes with a major caveat: It's not really a “rule” since everyone's situation is different. If you have a large retirement investment portfolio, you might not need to spend 4% of it every year. If you have limited savings, 4% might not come close to covering your needs.

Thanks to higher interest rates and bond yields, it is likely safe for new retirees to spend 4% of their nest eggs in their first year of retirement and then to adjust that amount for inflation in subsequent years, according to a new analysis from Morningstar released Monday.

The biggest problem with the 4% rule is that life is almost never as simple as we'd all hope. There may be some years in retirement that you need more than the rule allows and some years that you need less. This could be caused by moving locations, health problems, or other life changes.

What is this? Despite having more historical data (through 2022), the safe withdrawal rate is still 4%.

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.

Putting that much aside could make it easier to live your preferred lifestyle when you retire, without having to worry about running short of money. However, not a huge percentage of retirees end up having that much money. In fact, statistically, around 10% of retirees have $1 million or more in savings.

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.

The $1,000-a-month retirement rule says that you should save $240,000 for every $1,000 of monthly income you'll need in retirement. So, if you anticipate a $4,000 monthly budget when you retire, you should save $960,000 ($240,000 * 4).

“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.”

Is the 4 rule too conservative? ›

Retirees who are depending on their savings to fund essential expenses would want to have a conservative approach. However, those who have can withstand more market fluctuations may have more flexibility with withdrawal rates. For those retirees, the 4% rule likely will provide an outdated recommendation.

The “rule of four” is the Supreme Court's practice of granting a petition for review only if there are at least four votes to do so. The rule is an unwritten internal one; it is not dictated by any law or the Constitution.

History of the 4% rule

Based on a deep dive into the half century of market data, Bergen concluded that essentially any conceivable economic scenario (even the more tumultuous ones) would allow for a 4% withdrawal during the year they retire and then they'd adjust for inflation each subsequent year for 30 years.

If you have $400,000 in the bank you can retire early at age 62, but it will be tight. The good news is that if you can keep working for just five more years, you are on track for a potentially quite comfortable retirement by full retirement age.

Bottom Line. With $100,000 you should budget for a retirement income of around $5,000 to $8,000 on top of Social Security, depending on how you have invested your money. Much more than this will likely cause you to run out of money within 25 – 30 years, which is potentially within the lifespan of the average retiree.

Around the U.S., a $1 million nest egg can cover an average of 18.9 years worth of living expenses, GoBankingRates found. But where you retire can have a profound impact on how far your money goes, ranging from as a little as 10 years in Hawaii to more than than 20 years in more than a dozen states.

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).

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.

Once you reach 59½, you can take distributions from your 401(k) plan without being subject to the 10% penalty. However, that doesn't mean there are no consequences. All withdrawals from your 401(k), even those taken after age 59½, are subject to ordinary income taxes.