Does the 4% rule work for today’s retirement? (2024)

FAQs

Does the 4% rule work for today’s retirement? ›

While it's not guaranteed, multiple studies of the 4% rule show that there is near certainty that if you follow it your retirement savings will last for at least 30 years. Of course, this is based on what the stock market has done in the past and not necessarily on what it will do – no one can predict that.

The 4% rule comes with a major caveat: It's not really a “rule” since everyone's situation is different. If you have a large retirement investment portfolio, you might not need to spend 4% of it every year. If you have limited savings, 4% might not come close to covering your needs.

Ivanna Hampton: New retirees could kick off their golden years with a familiar number, 4%. A trio of Morningstar researchers analyzed starting safe withdrawal rates from an investment portfolio to fund retirement. The future looks good, and a little flexibility could make it even better.

A better approach could be to customize your portfolio withdrawal rates based on individual factors. A slew of recent studies try do that—tailoring spending estimates to things like a person's financial flexibility, health, and ownership of guaranteed-income products such as annuities.

In short, the 4% rule just assumes you're going to spend the same amount after inflation every year, that you're going to have a fixed lifestyle. And it uses failure rates to evaluate investment choices. “It's not realistic,” said Finke. “It's not efficient.”

You're not alone if your retirement account balances are far from the $1 million mark. While many people may aim for that goal, most don't reach it. Employee Benefit Research Institute (EBRI) data estimates that just 3.2% of Americans have $1 million or more in their retirement accounts.

Retiring with $500,000 could sustain you for about 30 years if you follow the 4% withdrawal rule, which allows you to use approximately $20,000 per year. However, retiring at a younger age will likely reduce the amount you receive from Social Security benefits.

“This rule protects the retirement investors from improper investment recommendations and harmful conflicts of interest. Retirement investors can now trust that their investment advice provider is working in their best interest and helping to make unbiased decisions.”

Late Retirement (age 70): If you're fortunate to have a robust portfolio in your late 70s and beyond, you might feel comfortable increasing your withdrawal rate. Our case study suggest that a pre-tax withdrawal rate of 5% or higher might be possible.

Retirees who are depending on their savings to fund essential expenses would want to have a conservative approach. However, those who have can withstand more market fluctuations may have more flexibility with withdrawal rates. For those retirees, the 4% rule likely will provide an outdated recommendation.

What is a good monthly retirement income? ›

Average Monthly Retirement Income

According to data from the BLS, average 2022 incomes after taxes were as follows for older households: 65-74 years: $63,187 per year or $5,266 per month. 75 and older: $47,928 per year or $3,994 per month.

For example, if you have retirement savings of $1 million, the 4% rule says that you can safely withdraw $40,000 per year during the first year — increasing this number for inflation each subsequent year — without running out of money within the next 30 years.

This money will need to last around 40 years to comfortably ensure that you won't outlive your savings. This means you can probably boost your total withdrawals (principal and yield) to around $20,000 per year. This will give you a pre-tax income of almost $36,000 per year.

When asked what a safe amount would be, she explained that it would be in the millions but depends on several factors, such as where you live, your expenses, and whether you own a home outright. She believes the amount you'd need to retire early would be closer to $5 or $10 million.

The risk of running out of money is an important risk to manage. But, if you're already retired or older than 65, your planning time horizon may be different. The 4% rule, in other words, may not suit your situation. It includes a very high level of confidence that your portfolio will last for a 30-year period.

The 4% rule is a widely known guideline for retirement spending that says you can safely withdraw 4% of your savings the first year, then adjust withdrawals for inflation annually. This rule aims to provide retirees high confidence that they won't outlive their savings for 30 years.

However, as of 2024, a new provision allows individuals to make penalty-free annual withdrawals to cover personal emergency expenses. Specifically, you can withdraw up to $1,000 from your qualified plan (e.g., 401(k), 403(b), 457(b)) or IRA (including SEP, Simple IRA) once each calendar year without penalty.

Specifically, those with over $1 million in retirement accounts are in the top 3% of retirees. The Employee Benefit Research Institute (EBRI) estimates that 3.2% of retirees have over $1 million, and a mere 0.1% have $5 million or more, based on data from the Federal Reserve Survey of Consumer Finances.

A plan distribution before you turn 65 (or the plan's normal retirement age, if earlier) may result in an additional income tax of 10% of the amount of the withdrawal. IRA withdrawals are considered early before you reach age 59½, unless you qualify for another exception to the tax.

As a rule of thumb, many retirees use 4% as their safe withdrawal rate—the so-called 4% rule. The 4% rule states that you withdraw no more than 4% of your starting balance each year in retirement, adjusted each year for inflation.