The 4% Rule
The 4% Rule is a widely-used guideline for retirement withdrawals. It says you can withdraw 4% of your portfolio in year one, then adjust for inflation each year, with a high probability your money lasts 30 years.
Developed by financial planner William Bengen in 1994 using historical data, it has become the benchmark for retirement planning.
Example
Withdrawal Rate Guidelines
| Rate | Risk Level | Strategy |
|---|---|---|
| 3% | Very Conservative | Maximum safety, large cushion |
| 3.5% | Conservative | High safety, accounts for sequence risk |
| 4% | Standard | The classic rule, historically safe |
| 4.5% | Moderate | Slightly higher risk, flexibility needed |
| 5%+ | Aggressive | Higher risk of running out |
Sequence of Returns Risk
Adjusting for Your Situation
Consider Withdrawing Less If...
- You want money to last 40+ years (early retirement)
- You have no pension or Social Security
- Market valuations are very high
- You want to leave an inheritance
You Might Withdraw More If...
- You have guaranteed income (pension, annuity)
- You can reduce spending if markets drop
- You have shorter retirement horizon
- You have other assets as backup
Dynamic Withdrawal Strategies
Rather than a fixed 4%, many retirees use flexible approaches:
| Strategy | How It Works |
|---|---|
| Guardrails | Increase/decrease withdrawals when portfolio moves outside bands |
| Percentage of Portfolio | Withdraw fixed % each year (varies with market) |
| Required Minimum | Withdraw IRS RMD percentage (increases with age) |
| Bucket Strategy | Keep 1-3 years in cash/bonds, rest in stocks |
The Role of Asset Allocation
Your stock/bond mix affects safe withdrawal rates:
| Allocation | Expected Return | Volatility | Safe Rate |
|---|---|---|---|
| 100% Bonds | Lower | Low | ~3% |
| 40/60 Stocks/Bonds | Moderate | Low-Medium | ~3.5% |
| 60/40 Stocks/Bonds | Moderate-High | Medium | ~4% |
| 80/20 Stocks/Bonds | Higher | Higher | ~4% |
Counterintuitively, some stock exposure (40-75%) generally supports higher safe withdrawal rates than all-bond portfolios, due to growth.
Social Security Timing
Delaying Social Security from 62 to 70 increases benefits by ~77%. Consider:
- Each year of delay = 6-8% permanent increase
- Survive past 80? Delay pays off
- Can withdraw more early, less when SS kicks in
- SS is inflation-adjusted and lasts for life
Bridge Strategy
Tax Considerations
Where you withdraw from affects taxes:
| Account | Tax Treatment | Strategy |
|---|---|---|
| Traditional 401k/IRA | Taxed as income | Keep in low brackets |
| Roth IRA/401k | Tax-free | Use flexible for high-tax years |
| Brokerage | Capital gains rates | LTCG more favorable |
| HSA | Tax-free for medical | Save for healthcare costs |
Frequently Asked Questions
Q: Is 4% still safe with lower expected returns?
A: Some researchers suggest 3.3-3.5% may be more appropriate with today's higher valuations and lower bond yields. Flexibility is key.
Q: What if the market crashes right after I retire?
A: Consider reducing withdrawals temporarily, or withdrawing from bonds/cash while stocks recover. This is 'sequence of returns' risk.
Q: Should I include my home in portfolio value?
A: Generally no, unless you plan to downsize or use a reverse mortgage. Your home doesn't generate income for withdrawals.
Q: How do I account for inflation?
A: The 4% rule assumes you increase withdrawals by inflation each year. This calculator includes that adjustment.
Q: What about healthcare costs?
A: Budget separately for healthcare, especially before Medicare at 65. Costs tend to increase with age. HSA funds are ideal for this.
Q: Can I spend more early in retirement?
A: Yes! 'Spending smile' research shows retirees often spend more early (travel, activities), less in middle years, and more again late (healthcare). Plan accordingly.
Retirement Planning Checklist
- Calculate your essential monthly expenses
- Add Social Security and pension income
- Determine gap that portfolio must fill
- Check if withdrawal rate is under 4%
- Build 1-2 years of expenses in cash/bonds
- Create a flexible withdrawal strategy
- Review and adjust annually
This calculator uses simplified assumptions. Actual retirement planning should account for taxes, healthcare, inflation, sequence of returns, and individual circumstances. Consult a financial advisor for personalized guidance.