Here's the Best Way to Use the Famous 4% Rule in Retirement

There's a reason so many people work hard to save as well as they can for retirement. Without savings, you may be forced to rely very heavily on Social Security for retirement income. And that could leave you with a serious shortfall.

The average retired worker on Social Security today collects a little more than $2,000 a month. Granted, that average benefit should rise a bit in 2026 once next year's 2.8% cost-of-living adjustment (COLA) takes effect. But still, it's common to need savings on top of Social Security to live well as a retiree. That's where your IRA or 401(k) plan comes in.

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One thing you don't want, however, is to see your retirement plan balance get whittled down to $0 in your lifetime. That's why it's important to manage your IRA or 401(k) strategically.

A good way to do that is to adopt a withdrawal strategy early on, rather than remove money from your savings at random. And to that end, financial experts have long recommended the 4% rule.

It's not a bad rule to consider if you want your money to last. But you may want to take a very specific approach to using the 4% rule.

How the 4% rule is supposed to work -- and why it may not work for you

The 4% rule is designed to make your savings last for 30 years. It has you withdrawing 4% of your savings plan balance your first year of retirement, and from there, adjusting future withdrawals as needed for inflation.

While the 4% rule might seem helpful, it actually has a few flaws.

First, it assumes you're looking at a 30-year retirement, which may not be the case if you're ending your career on the early or late side.

Also, it assumes that your portfolio is fairly evenly distributed between stocks and bonds. If you're a more aggressive investor, you may enjoy higher returns that could lend to a more generous withdrawal rate than 4%. If you're a very conservative investor, your portfolio may not earn enough to allow for a 4% withdrawal rate.

Also, the 4% rule assumes that your spending will be fairly consistent throughout retirement. But you may have plans to do a lot of traveling early on to capitalize on good health, and then slow down after seven or eight years or so. The 4% rule might limit you at the start of retirement, forcing you to give up experiences you can afford with proper planning.

The best way to use the 4% rule

Even though the 4% rule has some inherent flaws, it's a good starting point. Your best bet, therefore, may be to use it as just that -- a baseline.

Let's say you're a year away from retirement and want to figure out what annual income to expect from your IRA or 401(k). You can apply the 4% rule and see what that gives you. But you can, and should, play around with other withdrawal strategies -- either on your own or with the help of a financial advisor -- to figure out what makes the most sense for your situation.

Let's say you're retiring at 67 and expect to live 30 more years. Let's also say you want to spend your first five years of retirement living in a big city to enjoy the nightlife, only to then relocate somewhere much cheaper. With the right portfolio setup, you may be able to get away with taking 5% or 6% withdrawals for that first half decade, but then taking 3% withdrawals moving forward.

That's why you may not want to commit to the 4% rule per se, but rather, understand its purpose: to make your savings last. Once you recognize the importance of having a withdrawal strategy, you can work on developing one -- even if it looks different from the 4% rule itself.

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