The 4% Rule: Outdated or Not? Here’s What You Need to Know 

The 4% rule explained along with other expert “rules” to help educate yourself as you consider how much to withdraw from your retirement funds each year.

Banner

The weeks and months leading up to retirement are filled with many important decisions yet one of the most important may not have crossed your mind: Exactly how much should you withdraw each month from your retirement fund?  

This calculation depends on many unknowns including the length of your retirement, anticipated expenses and the returns you will receive on investments. Experts have devised several methods or approaches that you may want to consider when determining how much you will be able to withdraw. 

It's important to note that these “rules” are for informational and educational purposes and are not to be considered formal financial advice. Only you and your financial advisor should make any decisions regarding your retirement planning after thorough discussions and based on your specific and unique situation.

Saving is key

Regardless of the percentage you wish to withdraw, your calculations need to begin with how much you are able to save to support your retirement lifestyle. There are a variety of scenarios to considerThese are the most widely used:


  • The $1000 rule  says that you should save $240,000 for every $1000 you want to withdraw per month in retirement. (Experts say this usually allows for a 5% withdrawal target in most cases.)

  • The multiply by 25 rule is one of the easiest ways to estimate your retirement savings goal. Simply consider the lifestyle you’d like to have in retirement, total the budget you need yearly to support it and multiply that amount by 25. (Most agree that is the amount of money you will need to have saved for retirement if you wish to withdraw 4% per year.)

 

Now, let’s dig into the different “rules” for withdrawal:

 

4% rule


In the 1990s, financial advisor Bill Bengen determined that retirees should plan a maximum 4% per year withdrawal target. He arrived at this figure after examining the interest returned from stocks and bonds over a historical 50-year period. He found, on average, that a retiree using this rule could expect to withdraw from a retirement fund for at least 30 years before it would be exhausted, regardless of market conditions

 

Bengen has recently stated, however, that this percentage was calculated as a worst-case scenario. He feels that many have adhered too strictly to this target and that other withdrawal percentages may be a better fit for current-day retirees depending on their circumstances.

 

Like Bengen, many experts feel that 4% a withdrawal target provides a general “rule of thumb” for some retirees, although others say that it could be too aggressive, or perhaps not aggressive enough, depending on projected future stock and bond trends, inflation and the financial burden of any unexpected life events that may occur.


5% rule


Those who feel that 4% is too conservative of a withdrawal target usually support a 5% withdrawal rule. Keep in mind that this withdrawal may be difficult to sustain and it’s recommended that no debt be held if someone were to consider the 5% rule. If you are a long term investor with little debt and a diversified your portfolio you could consider increased withdrawals up to 5% or more per year.


3% rule


For those who are carrying debt in retirement or wish to leave a nest egg for their children, a 3.0-3.5% yearly withdrawal rule might be worth investigating. This target could allow you to continue to pay fixed expenses and weather any possible market downturns that might impact the value of your funds over the long term.


Also, if you are retiring early, you may want to contemplate this rule to see if your funds will last long enough to support you beyond the 20 to 30 year retirement window of those who typically exit the workforce in their 60s. 


This is considered to be the most conservative rule and may not be the best choice for everyone.

Rule breakers

It’s important to remember that your retirement goals are as unique as you are, and there’s no “one-size-fits-all” solution to how much you should save or how much you will need to support your retirement goals.

   

No one can predict the future including how long you will live in retirement or what the returns on your portfolio will be. Your portfolio may perform well enough so you can withdraw a lesser percentage per year, and still effectively withdraw the same or an even greater amount of money than you were able to at the previously higher percentage. 

  

myHealthPolicy is here for you!


Please visit our website or call us at 888-928-1456 to explore insurance coverage options to fit your needs and budget.

Help us, help you!

Provide your information

Bag
Please enter your ZIP code
Bag
Please enter your first name
Please enter your last name
Please select your state
Please select your county
Please enter your phone number
Please select your coverage interest
Looks like there was a problem from our side. Please submit the form again

By providing your information above and clicking the 'Get Started' button, you consent to receive calls, emails or text messages about Medicare Advantage, Medicare supplement insurance and prescription drug plan options from K.F.Agency, Inc. You understand that consent is not a condition of purchase. Your information and use of this site is governed by our most recent Terms of Use and Privacy Policy.

Thank you, @@FirstName Your request was sent successfully.

Thankyou Thumbnail
We've sent your information to one of our licensed insurance agents. You should be receiving a call from them momentarily.
Thankyou Thumbnail

This material provides general information about the described insurance product(s) for educational purposes only. This is not intended as investment advice or to recommend the insurance product(s).

The Company and its producers do not provide legal or tax advice. Each individual should seek specific advice from their own tax or legal advisors. The general and educational information presented in this material is a sales and marketing piece for insurance products offered by K.F. Agency Inc.

Related Articles

Let’s have a conversation!

Our helpful licensed sales agents are available to discuss over the phone or a cup of coffee...

Need help? Give us a call…

Call

Mon through Fri 9 AM - 9 PM ET, Sat 9 AM - 5:00 PM ET

Don't have a moment now?

Agent Request a call

In one short step, provide your contact information

X
Cookies help us improve your website experience.
By using our website, you agree to our use of cookies.
Confirm