Why the 4% Rule Could Fail Your Retirement -- and What to Do Instead
Key Points
The 4% rule has long been hailed as optimal for managing retirement savings.
But the 4% rule may not be suitable to your portfolio and retirement timeline.
Use the 4% rule as a starting point, but customize a withdrawal strategy to meet your needs.
- The $23,760 Social Security bonus most retirees completely overlook ›
A lot of people feel that saving for retirement is a difficult thing. But many seniors also struggle to spend their retirement savings once their careers come to an end. And a big reason boils down to a fear of running out of money.
If you don't want to put your nest egg at risk of running out in your lifetime, it's important to employ a smart withdrawal strategy. And to that end, the 4% rule could make sense.
Will AI create the world's first trillionaire? Our team just released a report on the one little-known company, called an "Indispensable Monopoly" providing the critical technology Nvidia and Intel both need. Continue »
Image source: Getty Images.
The 4% rule has you withdrawing 4% of your savings balance your first year of retirement. Future withdrawals are then adjusted for inflation.
It's a rule that financial experts have long supported. But it may not be right for you.
There are big problems with the 4% rule
The 4% rule might seem like a simple principle for managing your individual retirement account (IRA) or 401(k). But in reality, it could let you down, either by putting you at risk of running out of money or unnecessarily limiting the amount you can withdraw each year.
One issue with the 4% rule, for example, is that it assumes your portfolio is pretty evenly split between stocks and bonds. If you're more stock-heavy, though, a 4% withdrawal rate might mean shorting yourself on yearly income, since that type of portfolio might generate stronger returns. And if you're more bond-heavy, your portfolio may not earn enough to support a 4% withdrawal rate.
There's also the timing of your retirement to consider. The 4% rule is meant to support 30 years of retirement account withdrawals. If you end your career at 60, you might need more than 30 years of income from your savings. And if you work until 70, you may be looking at fewer.
It's best to come up with your own strategy
If you're going to follow the 4% rule for retirement, your best bet may be to use it as a starting point only, customizing a strategy that works for you. That strategy should hinge on:
- The composition of your portfolio
- Your retirement age and life expectancy
- Your annual spending needs
- Other income sources
You may, after running through different options, come to the conclusion that the 4% rule does, in fact, make sense for you. But it's important to look at other strategies before locking yourself into it.
In fact, one thing you may want to do is adopt a withdrawal strategy that evolves as your needs change. That could mean using a 5% withdrawal rate during the early stages of retirement when you're more active and scaling back to a 3% withdrawal rate when you're looking to slow down and do less.
So keep an open mind about managing your nest egg. And don't just fall back on the 4% rule, even if it's something you keep hearing about.
The $23,760 Social Security bonus most retirees completely overlook
If you're like most Americans, you're a few years (or more) behind on your retirement savings. But a handful of little-known "Social Security secrets" could help ensure a boost in your retirement income.
One easy trick could pay you as much as $23,760 more... each year! Once you learn how to maximize your Social Security benefits, we think you could retire confidently with the peace of mind we're all after. Join Stock Advisor to learn more about these strategies.
View the "Social Security secrets" »
The Motley Fool has a disclosure policy.
Recommended Articles
