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

FAQs

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

The 4% rule entails withdrawing up to 4% of your retirement in the first year, and subsequently withdrawing based on inflation. Some risks of the 4% rule include whims of the market, life expectancy, and changing tax rates. The rule may not hold up today, and other withdrawal strategies may work better for your needs.

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.

This rule aims to provide retirees high confidence that they won't outlive their savings for 30 years. Though popular, it has faced criticism in recent years due to forecasts for lower returns on investments. But some financial experts say that the 4% rule may be safe again due to higher bond yields.

Ivanna Hampton: New retirees could kick off their golden years with a familiar number, 4%. A trio of Morningstar researchers analyzed starting safe withdrawal rates from an investment portfolio to fund retirement. The future looks good, and a little flexibility could make it even better.

Your yearly expenses x 25 = A BIG NUMBER

THEN if I pull no more than 4% of that number out each year to live on in retirement I 'should' preserve the remainder of my investment, it won't deplete, and I won't run out of money.

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.

While the 4% rule can provide a helpful starting point for retirement planning, it's not a one-size-fits-all solution. Factors such as market fluctuations, medical expenses and personal tax rates must be considered when determining a safe withdrawal rate.

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.

In fact, statistically, around 10% of retirees have $1 million or more in savings.

What is the Biden retirement rule? ›

“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.”

The 4% rule and Social Security

You may be wondering if you should include your future Social Security income in this equation, and the simple answer is, you don't. Think of Social Security as added “security” to your retirement budget.

Retirement may seem like a distant dream, but it's never too early or too late to start planning. The “golden rule” suggests saving at least 15% of your pre-tax income, but with each individual's financial situation being unique, how can you be sure you're on the right track?

According to EBRI estimates based on the latest Federal Reserve Survey of Consumer Finances, 3.2% of retirees have over $1 million in their retirement accounts, while just 0.1% have $5 million or more.

Housing—which includes mortgage, rent, property tax, insurance, maintenance and repair costs—is the largest expense for retirees. More specifically, the average retiree household pays an average of $17,472 per year ($1,456 per month) on housing expenses, representing almost 35% of annual expenditures.

401(k) withdrawals after age 59½

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.

One frequently used rule of thumb for retirement spending is known as the 4% rule. It's relatively simple: You add up all of your investments, and withdraw 4% of that total during your first year of retirement.

The 4% rule suggests that retirees can safely withdraw 4% of their portfolio in the first year of retirement and then adjust that amount annually for inflation over the course of at least 30 years without having to worry about ever running out of money.