The 4 Percent Rule says you can withdraw 4 percent of your retirement savings per year, adjusted for inflation. It’s intended to help you preserve your nest egg so that your money can support you for at least 30 years of retirement.
However, a couple of recent phenomena have called the 4 Percent Rule into question. The first issue is the health of the stock market. If it’s in a slump or giving you several consecutive years of bad returns early in your retirement, then withdrawing 4 percent just compounds that problem. The other issue is low yields and low returns from stocks. These low yields or returns have hampered the growth of nest eggs, which may make an initial withdrawal rate of 3 percent more prudent.
Aside from the concern of too little money, though, there’s also the concern of ending up with too much! More than two-thirds of retirees who have followed the 4 Percent Rule have ended up with more than double their starting principal after 30 years. Depending on your lifestyle needs, adhering strictly to a 4 percent withdrawal rate may mean that you miss out on a lot of fun during those golden years — and you should get to enjoy the money you’ve worked so hard to accumulate!
Unfortunately, you can’t really tell which outcome you’ll have, so what should you do to make sure your nest egg will support you during retirement without living more frugally than you need to? Start with a withdrawal rate that makes sense for your situation and for the market conditions when you retire. Somewhere between 3 and 4 percent is usually a safe bet, but it’ll depend on your assets and your sources of income.
Next, adjust your withdrawal each year based on how well your nest egg is performing and how your expenses are changing. In a thriving market, you can get away with boosting withdrawals a little, while a market slump might mean you should withdraw a bit less that year. Either way, you’ll want to be aware of how much you actually need. In the end, the 4 Percent Rule isn’t perfect, but it remains a good rule of thumb you can use as a jumping off point for your own retirement planning.
-Authored by NewsletterPro