Is 4% Rule Too High? Rule Inventor Says It Should Be 4.7% Rule (2024)

FAQs

Is 4% Rule Too High? Rule Inventor Says It Should Be 4.7% Rule? ›

Retirement Savings: 4% Rule Makes Them Last 30 Years

The 4% rule has been updated to the 4.7% rule by William Bengen. This revision is a response to the inclusion of additional asset classes like US micro-cap and small-cap stocks, which significantly increased the withdrawal rate. It's important to keep this updated figure in mind when planning for your retirement.

The 4% rule is a reasonable baseline, but it also has serious drawbacks. Among them: Retirees often want to vary their spending during retirement. Many people don't retire for three decades. Market conditions affect how much you can safely withdraw.

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.

This rule is based on research finding that if you invested at least 50% of your money in stocks and the rest in bonds, you'd have a strong likelihood of being able to withdraw an inflation-adjusted 4% of your nest egg every year for 30 years (and possibly longer, depending on your investment return over that time).

Calculating your safe withdrawal rate requires you to account for your age and spending, inflation and investment returns. While the 4% rule is the most famous and commonly cited withdrawal rate, there are other, more dynamic, ways to approach your account withdrawals and overall retirement income plan.

We did the math—looking at history and simulating many potential outcomes—and landed on this: For a high degree of confidence that you can cover a consistent amount of expenses in retirement (i.e., it should work 90% of the time), aim to withdraw no more than 4% to 5% of your savings in the first year of retirement, ...

By considering both average returns and unexpected events like the 1929 market crash, Bengen determined that a retirement portfolio made up of 60% equities and 40% fixed income assets should last over 30 years if you withdraw only 4% of the total amount annually.

Suze Orman is right. In order to retire early, you need at least $5 million in investable assets. With interest rates so low, it takes a lot more capital to generate the same amount of risk-adjusted income.

However, not a huge percentage of retirees end up having that much money. In fact, statistically, around 10% of retirees have $1 million or more in savings.

What is the average 401k balance for a 65 year old? ›

It is 100% possible to retire with $400,000, provided you're not looking to enjoy a particularly expensive retirement lifestyle or hoping to leave the workforce notably early.

Yes, it is possible to retire very comfortably on $900k. This allows for an annual withdrawal of around $36,000 from age 60 to 85, covering 25 years. If $36,000 per year or $3,000 per month meets your lifestyle needs, $900k should be plenty for retirement.

If you can set aside a solid amount of cash, you can avoid this risk by tapping into your savings when assets are down and replenishing that fund when they bounce back. Yes, it is possible to retire with $1 million at the age of 65.

The 4% rule limits annual withdrawals from your retirement accounts to 4% of the total balance in your first year of retirement. That means if you retire with $1 million saved, you'd take out $40,000. 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 and Social Security

You may be wondering how you include your future Social Security income in this equation, and the simple answer is, you don't. It wasn't designed to take that into account.

This rule suggests that retirees can withdraw 4% of their retirement savings every year for the duration of their retirement. However, as economic landscapes and life expectancies evolve, the original 4% rule is increasingly being considered outdated and in need of a revamp.

The 25x rule entails saving 25 times an investor's planned annual expenses for retirement. Originating from the 4% rule, the 25x rule simplifies retirement planning by focusing on portfolio size.