Relying on the 4% Rule in Retirement? In These Situations, You Shouldn't

Key Points

• The 4% rule is designed to help your savings last for 30 years.

• It doesn't necessarily apply to anyone.

• A different withdrawal rate may better serve your needs.

• The $23,760 Social Security bonus most retirees completely overlook ›

There's a reason so many people end up relying heavily on Social Security for retirement income. Saving for retirement can be a huge challenge. And it's not a given that you'll end up with a sizable nest egg by the time your career wraps up.

That said, many people do manage to enter retirement with a nice amount of savings. You might get there if you begin funding your IRA at a young age. Or, you might use 401(k) matches to your advantage to amass a large portfolio over time.

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No matter how much savings you have at the start of retirement, it's important to do what you can to ensure that your money lasts. And part of that involves sticking to a smart withdrawal strategy.

For years, experts were quick to promote the 4% rule. It states that if you withdraw 4% of your savings balance your first year of retirement and adjust future withdrawals for inflation, your money has a strong chance of lasting 30 years. But while the 4% rule may work for some people, if any of these situations apply to you, you may not want to use it.

1. You're looking at a longer retirement than average

Many people dream of being able to retire early. If you're confident you have enough savings to pull it off, there can be benefits to leaving the workforce ahead of your peers. But from a withdrawal strategy, it's important to recognize that the 4% rule may not work for you.

The 4% rule generally assumes a 30-year retirement window. If you'll need your money to last much longer due to an early retirement, you may want to stick to a less aggressive rate of withdrawal.

2. You're looking at a shorter retirement

Just as early retirement should cause you to rethink the 4% rule, so should a late retirement. If you end up working until your mid-70s, you may not need 30 years of income out of your portfolio.

In that case, why not allow yourself larger withdrawals so you can enjoy the money you've worked hard to save? Unless you're hoping to leave a huge inheritance behind, a 4% withdrawal rate could mean denying yourself money you can easily afford to take out of your savings.

3. Your portfolio is very conservative

The 4% rule usually hinges on the assumption that a given portfolio has a fairly equal mix of stocks and bonds. If your portfolio is invested more conservatively, though, then it may not generate the income needed to sustain a 4% withdrawal rate.

Take a look at your how portfolio is allocated and be honest with yourself. If you're loaded with bonds because you're worried about risk, that may be an appropriate strategy for you. But it's also one that may not support a 4% withdrawal rate, but rather, a lower one.

4. You're retiring during a down market

You can't predict or control what the stock market is like at the time your retirement begins. But if you're first ending your career in a down market, sticking to a lower withdrawal rate could work to your benefit.

If you withdraw 4% of your savings when the market is down, your portfolio may not get a chance to recover from that decline. That could leave you short on income for the rest of your senior years.

There's nothing wrong with using the 4% rule as a starting point for managing your nest egg. But before you decide to apply it to your savings, make sure that's really appropriate. You may find that you're better off using a more or less conservative withdrawal rate, or that it pays to keep adjusting your withdrawal rate over time.

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