The 4% Rule
The 4% rule is a popular retirement withdrawal strategy that suggests retirees can safely withdraw an amount equal to 4% of their savings during the year they retire and then adjust for inflation each subsequent year.
The rule was developed by financial advisor William Bengen in 1994, who analyzed historical stock and bond returns over a 50-year period. He found that retirees who followed the 4% rule had a 95% chance of not outliving their money during a 30-year retirement.
The 4% rule is a simple rule of thumb, and it is important to note that it is not a guarantee. There are a number of factors that can affect how long your retirement savings will last, such as your investment returns, inflation, and your spending habits.
However, the 4% rule can be a good starting point for planning your retirement withdrawals. It is important to work with a financial advisor to create a retirement plan that is tailored to your individual needs and circumstances.
Here is an example of how the 4% rule works:
- Let’s say you have $1 million saved for retirement.
- In your first year of retirement, you would withdraw $40,000 (4% of $1 million).
- In your second year of retirement, you would adjust your withdrawal amount for inflation. If inflation were 2%, for example, you would withdraw $40,800 ($40,000 x 1.02).
- You would continue to adjust your withdrawal amount for inflation each year.
By following the 4% rule, you would have a very high probability of not outliving your money during a 30-year retirement.
It is important to note that the 4% rule is just a starting point. You may need to adjust your withdrawal rate up or down depending on your individual circumstances. For example, if you have a shorter life expectancy, you may be able to withdraw a higher percentage of your savings each year. On the other hand, if you have a longer life expectancy or if you have volatile investment returns, you may need to withdraw a lower percentage of your savings each year.
It is also important to note that the 4% rule is based on historical data. Past performance is not indicative of future results, and there is no guarantee that your investment returns will be sufficient to support a 4% withdrawal rate.
If you are considering using the 4% rule to plan your retirement withdrawals, it is important to work with a financial advisor to create a retirement plan that is tailored to your individual needs and circumstances.
