The 4% rule isn't a bad starting point, but I'm taking a more customized approach.
Whether you kick off your senior years with a nest egg worth $300,000 or $2 million, there's unfortunately always the worry that your money might run out. That's why financial experts have long advised savers to follow the 4% rule in managing their retirement funds. But while that rule is a decent starting point, it's not one I plan to follow.
I'd rather play things a bit safer
Under the 4% rule, you start by withdrawing 4% of your savings balance your first year of retirement. You then adjust subsequent withdrawals for inflation. Stick to that plan, and there's a strong chance your nest egg will last 30 years.
Image source: Getty Images.
But I have a couple of problems with the 4% rule. First, it assumes a fairly even mix of stocks and bonds, which not all retirees have. Also, it relies on fairly strong bond yields. And while savers may be getting those today, who's to say what they will be years down the road?
That's why I plan to tap my savings more conservatively. I haven't landed on a specific withdrawal rate yet, but my thinking is to go with 2% to 3%.
I also hope to work in some capacity during retirement -- as much for the sake of keeping busy as for the money. So depending on how that plan shakes out, I may not need to withdraw 2% to 3% of my savings each year.
I plan to invest in income-generating assets
Another thing I hope to do in retirement is set myself up with assets that generate income, including dividend stocks, REITs, and municipal bonds.
If you have enough income-generating investments in your portfolio, you may be able to live off of your yearly gains in retirement, leaving your principal untouched. That's a situation I'd love to land in.
Ultimately, to decide on the right retirement withdrawal rate for you, you'll have to look at how your money is invested, what your expenses amount to, and what other income sources you have available. But don't automatically assume that the 4% rule is the perfect solution.
FAQs
The 4% Rule: Why It's Not Ideal for Early Retirement
My biggest issue is that it doesn't account for the flexibility of most early-retirees. It's for standard retirement, and “traditional” retirees in their 70s or 80s aren't likely to have as much lifestyle or spending flexibility as someone in their 30s or 40s.
Should you break the 4% rule? ›
The 4% rule was based on a portfolio of 50% stocks and 50% bonds. Most financial professional today will suggest that you diversify your portfolio more than this. It's likely that your actual retirement savings will differ, and they may include cash, precious metals, investment properties, and more.
How do I ensure I don't run out of money in retirement? ›
To avoid this, it's crucial to establish a sustainable withdrawal rate. We recommend doing this with the help of a professional, who can use cashflow modelling for greater accuracy. It's also important to review your forecast at least once a year to ensure you have plenty left.
How long will money last using the 4% rule? ›
According to the rule, this amount is safe enough that you won't risk running out of money during a 30-year retirement. The 4% rule Open in new tab also assumes that you have about 50% of your investments in equities or stocks, and 50% in fixed income assets like bonds.
What are the assumptions of the 4% rule? ›
The 4% rule assumes you increase your spending every year by the rate of inflation—not on how your portfolio performed—which can be a challenge for some investors. It also assumes you never have years where you spend more, or less, than the inflation increase.
Is the 4 rule too conservative? ›
The 4% rule aims to minimize the risk of failure (running out of money) by being very conservative with spending early in retirement. However, this comes at the cost of potentially underutilizing one's savings and not being able to spend more if investment returns are favorable.
How long will $400,000 last in retirement? ›
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.
Can I retire at 60 with 300k? ›
£300k in a pension isn't a huge amount to retire on at the fairly young age of 60, but it's possible for certain lifestyles depending on how your pension fund performs while you're retired and how much you need to live on.
How long will $600,000 last in retirement? ›
You expect to withdraw 4% each year, starting with a $24,000 withdrawal in Year One. Your money earns a 5% annual rate of return while inflation stays at 2.9%. Based on those numbers, $600,000 would be enough to last you 30 years in retirement. In fact, by age 92 you'd still have over $116,000 in savings.
How many people have $1,000,000 in retirement savings? ›
How Many People Have $1,000,000 in Retirement Savings? According to Fidelity's Q3 2023 report, about 378,000 people had more than a million dollars in their 401(k)s.
You can retire a little early on $400,000, but it won't be easy. If you have the option of working and saving for a few more years, it will give you a significantly more comfortable retirement.
How long will $500,000 last in retirement? ›
As mentioned, $500,000 can last for over 30 years if budgeted correctly. However, there are a number of caveats to this, including how long you need your retirement savings to last you.
What is the 4 rule of? ›
The 4% rule stands as a favored approach in retirement planning. It offers a straightforward and cautious guideline for estimating the amount you can prudently withdraw from your retirement funds annually, aiming to ensure your financial security throughout your retirement years.
How do you calculate the 4 rule? ›
The 4% rule is a popular retirement withdrawal strategy that suggests retirees can safely withdraw the amount equal to 4% of their savings during the year they retire and then adjust for inflation each subsequent year for 30 years.
