Does The 4% Rule Still Hold True for Today’s Retirees?

Whether you’re preparing for retirement or already there, you’ve likely heard about the 4% rule. This common retirement rule-of-thumb originated in 1994 and has served as the jumping-off point for millions of retirees since.

Does the 4% rule still serve its purpose in today’s changing economic environment? Below we provide an in-depth look at the 4% rule and what retirees should consider based on today’s economic environment.

What Is the 4% Rule?

For decades, the 4% rule has been considered the gold standard for funding retirement. It’s often referenced as a retirement income guideline to help new and soon-to-be retirees determine if they’ve saved enough for their golden years.

The 4% rule was created by William Bengen in 1994, based on a 50-year analysis of stock and bond performance between 1926 and 1976. In concluding his studies, he found that even during times of market turmoil, there was no scenario in which an annual 4% withdrawal rate diminished a portfolio in less than 33 years.1  

The general idea is that retirees should withdraw 4% of their portfolio each year (adjusted for inflation). At this rate, you should, according to Bengen’s analysis, not outlast your savings.

The 4% rule is a general concept that makes several critical assumptions. 

  • First, it assumes retirement is about 30 years long. 
  • Second, it assumes retirees have a 60/40 portfolio, with about 60% stocks and 40% equities. 

Up until now, these assumptions have decently reflected the average retiree living throughout the twentieth century and into the early 2000s.

As we’ll discuss below, however, the 4% rule does not necessarily meet today’s retirees’ needs or the current economic environment.

Flaws in the 4% Rule

While the 4% rule has been the go-to method for retirees over the last several decades, there are certainly some cracks in the foundation of its logic.

This rule leaves no room to consider your personal needs or goals. In fact, it really doesn’t know at all what you need to maintain your standard of living in retirement. While some people are comfortable with $40,000 a year, others know they’ll need $100,000 or more. If what you need to live comfortably in retirement exceeds the 4% rule, creating different savings targets or withdrawal strategies may be necessary to suit your needs better.

Along the same vein, 4% of your savings might be more conservative or restrictive than what’s truly necessary. Spending less could mean missing out on the benefits of your hard-earned savings. This argument has been a common criticism by financial professionals in recent history.

But as we’ve all seen, the financial landscape since the onset of Covid-19 has been unlike any other in history. As such, some are worried that 4% is actually too much to be spending year after year in retirement, especially for those who left the workforce early, whether by choice or force. 

Historically speaking, high inflation has created a rise in equity markets, resulting in a low-yielding bond environment. As such, retirees with a traditional 60/40 portfolio are seeing lackluster—even troubling—performance from bonds. Because of this, the money withdrawn during retirement isn’t being replaced at a rate that makes the 4% rule viable.

Considerations for the 4% Rule 

We encourage you to think of this as more of a guideline than an actual rule. It’s important to know what it is and how retirees have used it in the past. From there, consider applying the rule to your own nest egg as a starting point.

  • What is 4% of your retirement savings? 
  • Are you happy with that number and comfortable with your ability to live off of it in retirement? 
  • Is it more than you need? Is it less?

Starting to consider these questions is crucial in addressing your needs for retirement. It allows you to face the numbers head-on and create a realistic vision for how your savings will work for you. 

Preparing for Retirement with Retire To

Those nearing retirement need to create a balanced and well-diversified portfolio. If you’re concerned you don’t have enough saved up, consider all additional sources of guaranteed income, like Social Security, pension plans, annuities, bond ladders, and more. 

These will be powerful tools for meeting your income needs in retirement during periods of economic uncertainty.

We specialize in helping individuals and couples prepare for and thrive in retirement. If you’re concerned about your retirement and looking for guidance on retirement income planning, don’t hesitate to reach out. 

1The 4% Rule

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