Should You Follow the 4% Rule When You Retire?

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I JUST READ THAT the 4% rule is making a comeback. From where, I thought?

Under the 4% rule, you withdraw 4% of your nest egg in the first year of retirement. If you had $1 million, you’d take 4%, or $40,000. In year two, you’d add inflation to your previous year’s withdrawal. Say inflation ran at 6%. You’d multiply $40,000 by that 6% to get the second-year adjustment of $2,400. Add that to the prior year’s $40,000, and you’d take $42,400. And so it goes on.

Research suggests a retirement kitty could last 30 years using this rule, provided you hold a balanced portfolio of, say, 50% stocks and 50% bonds.

Lately, experts have been tweaking the 4% rule a bit. For instance, the folks at Chicago investment researchers Morningstar have suggested an initial withdrawal rate of 3.3% was more prudent. No matter what the exact percentage, most people need an easy-to-understand withdrawal formula for their retirement assets.

Easy doesn’t mean we should get lulled into complacency, however. Truth is, there are some factors beyond our control. The stock market’s histrionics are one, and another is the inflation rate. In theory, these ups and downs should balance themselves out over a 30-year retirement period—from, say, age 65 to 95.

It’s much harder to stretch savings over longer timespans, such as those who want to retire at age 50 and then have their savings last until age 95. Good luck with that. Believe me, things can get rough enough during the standard 30-year retirement. Look no further than 2022. Stocks fell, bonds fell and inflation jumped.

It’s no time to panic, however. If we invest too conservatively, say by throttling back on stocks, we risk losing the race against inflation. Over enough time, our savings would evaporate.

One answer is to have multiple sources of retirement income, both guaranteed and variable. Most of us have a 401(k) or IRA. That’s variable income. Then there’s Social Security, which is guaranteed—at least for now. That guaranteed Social Security income is the most valuable “asset” most retirees possess, followed by the equity in their home.

Should these be our only assets in retirement? I don’t think so. Some people have a regular taxable brokerage account. That money might be invested in index mutual funds or exchange-traded index funds. Alternatively, income-oriented investors might choose to invest in dividend-paying stocks or a municipal bond fund. Muni income escapes federal tax and usually state income tax as well, provided you live in the state where the bonds were issued.

You don’t need millions of dollars to open multiple accounts. Today, most financial firms have a low or no investment minimum. When you read about saving for retirement, that doesn’t mean all your savings must be kept in qualified retirement vehicles, like a 401(k) or IRA. Instead, mix it up and stay flexible.


For instance, in retirement, if you need more income one year, you could turn off the income reinvestment on one or more of your investments. During times of plunging financial markets, you might take the precaution of setting aside a portion of your required minimum distribution for future use. Alternatively, you could tighten your belt and skip an inflation adjustment for one year. People already have a natural tendency to spend a little less when the market’s down.

The 4% rule may be making a comeback. But it’s just a starting point—and you shouldn’t necessarily follow it precisely.

Join the 4% rule conversation in our Community!

In addition to writing for HumbleDollar, Dick blogs at his own site, Before retiring in 2010, he was a compensation and benefits executive.

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