The 4 Percent Rule – Revisited

“How much of my nest egg can I withdraw each year without running out of money?”

That’s the age-old question retirees ask themselves and their financial planners. It’s especially important when you consider that one of our biggest retirement fears is running out of money.

Well, the 4% rule, which has guided retirement finances for 30 years, seemed out of favor just a few years ago. But it may be the answer once again – with qualifications.

What is the 4% rule?

According to the rule, if you make withdrawals from your retirement accounts at a rate of 4% in the first year and adjust for inflation every year after, much like Social Security, your income will probably last three decades. It was created by financial advisor William P. Bengen in 1994 when he was looking for a safe retirement withdrawal strategy for his clients.

How does it work?

Assume you have a retirement nest egg of $1 million.

• In year one you withdraw $40,000, or 4% of $1 million.
• In year two, If inflation was 2%, take out the original $40,000 plus 2%, or $40,800 to account for inflation.
• In year three, if inflation rises to 3%, you adjust for inflation again. Based on the previous year’s withdrawal ($40,800 plus 3%, you withdraw $49,440).

Is a 1990s withdrawal strategy still relevant?

Some financial advisors wrote off the rule later as too conservative, but its relevance seems to be gaining traction once again. Many still find it useful as a rule of thumb, especially for those self-investors who do not have a financial planner.

Morningstar says, in advice to investors, its number has ranged from 3.3% to 4% between 2021 and 2024—assuming a balanced portfolio, fixed real withdrawals over a 30-year retirement, and a 90% probability of success. “That said, these are conservative estimates for fixed withdrawal rates, and retirees can also use flexible withdrawal systems to enlarge their starting and lifetime withdrawals,” Morningstar says.

Craig J. Ferrantino, founder and president of Craig James Financial Services in Melville, New York, says the 4% rule is still useful as a rule of thumb.

“I think it’s useful,” Ferrantino observes. “It’s a good way to look at life for do-it-yourselfers without having anything more technically available to them. It’s a straightforward rule. It allows people to understand how much they would need to live on in retirement and the 4% without running out of money. That’s the purpose. It does exclude some things, including future taxation and things like that. But I think it’s been quite useful so far over the many years I’ve been doing this.”

But Wait…

The now-retired Bengen says the rule it is not for everyone. (He has a new book, “A Richer Retirement: Supercharging the 4% Rule to Spend More and Enjoy More.”)  Bengen says the 4% rule was never meant to be a cookie-cutter golden rule. “It’s really designed for only the most conservative person to use in retirement planning.” He has updated the portfolio on which he based the rule to be more rounded.

“It’s really important to recognize that the rule is a very limited case that applies to a very, very small number of retirees who want to be ultra conservative and withdraw only at the rate that would allow them to get through anything that’s happened over the last 100 years,” he says.

“I’ve upgraded it to 4.7% since (by adding more varied investments to the portfolio), but most retirees can take a lot more than 4.7% – even in this environment, where stocks are very expensive and that generally drives withdrawal rates down.”

Today, Bengen says most retirees can comfortably take out 5.25% to 5.5% without worrying about running out of money.

Who should use it and how should they use it?

Ferrantino says the rule fell out of favor when the rate of inflation increased. It’s more relevant with lower inflation numbers, he says. “I do some quick analysis with the 4% rule. People need that number. They need to know that that number is real and it’s pretty close, within a few tenths of a percent.”

He uses the rule as a starting point discussion, Ferrantino says.  For example, going back to $1 million in savings, you would withdraw $40,000. “Depending on where you are in the country, that could be a lot of money or that could be a little bit of money. But add the $40,000 to $30,000 in Social Security income (or IRA withdrawals), and you get to $70,000. It should satisfy a good part of the United States, not super comfortably, but enough to make it work for most of the country.

“I like the 4% rule because it’s part of the investment planning vernacular,” he says. “It’s already burned into people’s minds. You have to remind them of it.”

Don’t Set it and Forget it

Bengen, meanwhile, says he doesn’t see that safe withdrawal rate increasing much more than 5%. “People should recognize that when I set up a plan to withdraw money from their retirement accounts, that it’s just like any other long-range plan. It needs to be monitored and possibly adjusted during retirement, so that they don’t get into a situation where they’re overspending. And don’t be overly concerned about the effect of the markets, because they come and go. It’s inflation that’s a real threat to us retirees.”

 

Rodney A. Brooks is an award-winning journalist and author. The former Deputy Managing Editor/Money at USA TODAY, his retirement columns appear in U.S. News & World Report and Senior Planet.com. He has also written for National Geographic, The Washington Post and USA TODAY and has testified before the U.S. Senate Special Committee on Aging. His book, “The Rise & Fall of the Freedman’s Bank, And Its Lasting Socio-economic Impact on Black America” was released in 2024. He is also author of the book “Fixing the Racial Wealth Gap.” His website is www.rodneyabrooks.com

 

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