Individuals nearing their retirement years may find themselves asking a critical question: “How much can I spend annually from my retirement savings without risking running out of money?” This concern is a pillar of financial management, and to answer it, many turn to a well-known retirement guideline known as the 4% rule.
| Key takeaways ● The 4% rule offers guidance on how retirees can manage their spending needs over a 30-year period. It suggests an initial withdrawal rate of 4% of your retirement account, followed by adjustments for inflation annually. ● While the 4% rule is a good benchmark to ensure a steady income, it does not account for tax status, investment fees, or major changes in market conditions. ● A personalized withdrawal strategy is often more appropriate to address longevity risk, medical expenses, and the unique financial planning goals of each retiree. |
What is the 4% rule?
The 4% rule for retirement refers to a popular strategy of withdrawing 4% of one’s retirement portfolio in the first year of retirement. For every subsequent year, you adjust that specific dollar amount to account for inflation. This withdrawal strategy was designed with the goal of providing a steady income stream that can support a retirement horizon of approximately 30 years.
The origins of the 4% rule
The 4% rule was first conceived by financial planner William Bengen in 1994. Before his research, many retirees and financial planners struggled to determine a withdrawal level that could withstand different market conditions. Bengen wanted to find a rate that would have survived even the most difficult economic eras in American history.
To do this, he analyzed historical market data spanning back to 1926, which covered the Great Depression, the high-inflation years of the 1970s, and various market crashes. Bengen tested how different retirement withdrawal rates would have performed over 30-year rolling periods.
His research into historical data showed that this approach may have supported retirement spending across many 30-year periods, though outcomes varied based on market conditions. Because of this, the 4% rule became a cornerstone of retirement income strategy discussions. While some modern financial advisors debate the exact percentage, the 4% rule for retirement remains a helpful guideline for estimating retirement income.
How the 4% rule works in practice
To understand how retirees use this as a spending plan, let’s use a $1 million retirement account as an example.
Step 1: Calculate your initial withdrawal
In your first year of retirement, take 4% of your total retirement assets. For a $1 million retirement account, this equals an initial withdrawal of $40,000 to cover your living expenses.
Step 2: Adjust your withdrawal for inflation
In every subsequent year, increase the prior year’s amount based on the rate of inflation annually. For example, if inflation is 3%, your second-year withdrawal becomes $41,200 ($40,000 + 3%).
Step 3: Maintain your strategy regardless of market changes
Some retirees following this framework maintain a consistent withdrawal approach over time, ignoring short-term market fluctuations. However, many still adjust spending based on market performance and personal circumstances.
The importance of asset allocation
The 4% rule is not just about the withdrawal rate; it is also about how your retirement portfolio is invested. Bengen’s original research was based on a balanced portfolio consisting of 50% large-cap stocks and 50% intermediate-term Treasury bonds.
Investing involves risk, and the way you structure your asset allocation can hugely impact your portfolio performance.
Stocks and bond returns
A mix of stocks and bonds is used to balance growth and stability.
● Stocks: Investing in assets such as large-cap stocks and international stocks offers the potential for long-term growth, which may provide long-term growth potential that can help support purchasing power over a long retirement horizon.
● Fixed income: Fixed-income securities such as government or corporate bonds can be more resilient during market downturns. Bond returns may be lower than stock returns, but they serve as a cushion when the stock market experiences volatility.
Many retirees find that a balanced portfolio helps them navigate market performance without excessive anxiety. However, your unique risk tolerance may require a more tailored balance between fixed-income assets and equities.
Benefits and challenges of the 4% rule
Like any other financial strategy, the 4% rule has both strengths and weaknesses.
Advantages of the 4% rule
● Simplicity: It is easy to calculate and provides a clear target for retirement planning.
● Benchmark for savings: You can use the 4% rule in reverse to estimate your savings goal. If you want $60,000 in annual income, you can multiply that by 25 to see that you might need $1.5 million.
● Historical resilience: The 4% rule was tested against historical data that included some of the worst market conditions on record, such as the 1929 and 1973 crashes.
Limitations of the 4% rule
● Rigidity: It assumes your spending needs will increase by a fixed inflation rate every year. In reality, many retirees spend more early in retirement on travel and less later, though medical expenses can spike in later years.
● Taxes and fees: The 4% rule typically refers to gross withdrawals. It does not account for investment fees or your tax status. If you are withdrawing from taxable accounts, a portion of that 4% will go to the Internal Revenue Service (IRS).
● Market timing: A severe bear market early in retirement, known as a sequence of returns risk, can be particularly damaging to a portfolio using a fixed withdrawal rate.
Is the 4% rule still relevant today?
As we move through 2026, many experts have revisited the original historical market data. Recently, Bengen himself updated his findings. He suggested that by adding a broader range of assets such as small-cap stocks and international stocks, an initial withdrawal rate of 4.7% might be more appropriate for some retirees.
Conversely, some financial planners express caution. They point out that with high-equity valuations and rising interest rates, stock and bond returns in the future may not mirror past performance. Some suggest that a 3.3% or 3.5% rate is a more helpful guideline for those who are particularly concerned about longevity risk. These figures are illustrative only and are not recommendations, as sustainable withdrawal rates depend heavily on individual circumstances.
If you plan to retire early, the 30-year assumption of the 4% rule may not apply. For an early retirement, you may need your retirement funds to last 40 or 50 years, which usually requires a lower sustainable withdrawal rate.
Factors that impact your withdrawal strategy
While the 4% rule is a helpful starting point, it’s best to create a personalized withdrawal strategy by considering the following:
Social Security benefits
Your Social Security income significantly reduces the amount you need to withdraw from your investment accounts. For example, waiting until age 70 to claim can increase your benefit, but it may require higher withdrawals from your retirement savings in the meantime.
Tax management
Different types of taxable accounts, such as a 401(k)s, and tax-free accounts, such as a Roth IRA (individual retirement account), are subject to different rules. A strategy that considers your tax status can help you explore tax-efficient opportunities and manage your lifetime tax liability.
Life expectancy
If you want to retire early, your money may need to last for decades beyond the standard 30-year model. Factor in your life expectancy so that your spending plan is robust enough to last throughout your retirement years.
Required minimum distributions
The IRS mandates that you take required minimum distributions from certain financial accounts once you reach a certain age. These required withdrawals may exceed 4%, which can disrupt a rigid spending plan and increase your tax burden.
Navigating market volatility
Market cycles are inevitable. Market downturns, market fluctuations, and even a full bear market are likely to happen during your retirement. To manage market risk, many retirees use a guardrail approach: they take a 4% withdrawal when market performance is strong but skip their inflation adjustment or reduce their spending when the stock market is down. This flexibility can help you navigate market crashes without depleting your principal.
Another method is the bucket approach, where you retain one or two years worth of living expenses in the form of cash or short-term fixed income. This way, you won’t need to sell stocks should a market downturn occur, giving your retirement assets time to recover.
Why partner with MY Wealth Management?
At MY Wealth Management, we understand that you are not a statistical average. Your goals, your family, and your legacy require more than a simple percentage.
As a fiduciary organization, we are always committed to acting in your best interests. We take a holistic view of your financial life, going far beyond just your withdrawal rate, to offer a broad range of services designed to secure your financial future:
● Custom asset allocation: We provide insight and guidance on the right mix of stocks and bonds, ensuring your investments align with your risk tolerance and retirement horizon.
● Proactive tax advice: We analyze your taxable accounts and IRAs to help manage your tax burden and explore tax-efficient opportunities.
● Comprehensive review: We provide an analysis of your investment fees, Social Security benefits, and required minimum distributions so that no detail is overlooked.
● Dynamic planning: We help you navigate rising costs, market fluctuations, and rising interest rates with a plan that adapts as your life changes.If you’re 50 or older with at least $750,000 in retirement savings, we can help you explore strategies for generating retirement income and managing taxes as part of a broader retirement planning process. Book your free retirement evaluation to gain clarity on how to structure your retirement income and manage your retirement portfolio efficiently.
