Home » News & Events » The 4 Percent Rule – Revisited
by Rodney A. Brooks for Senior Planet
“How much of my nest egg can I withdraw each year without running out of money?”
That’s the age-old question retirees ask themselves and their financial planners. It’s especially important when you consider that one of our biggest retirement fears is running out of money.
Well, the 4% rule, which has guided retirement finances for 30 years, seemed out of favor just a few years ago. But it may be the answer once again – with qualifications.
According to the rule, if you make withdrawals from your retirement accounts at a rate of 4% in the first year and adjust for inflation every year after, much like Social Security, your income will probably last three decades. It was created by financial advisor William P. Bengen in 1994 when he was looking for a safe retirement withdrawal strategy for his clients.
Assume you have a retirement nest egg of $1 million.
Some financial advisors wrote off the rule later as too conservative, but its relevance seems to be gaining traction once again. Many still find it useful as a rule of thumb, especially for those self-investors who do not have a financial planner.
Morningstar says, in advice to investors, its number has ranged from 3.3% to 4% between 2021 and 2024—assuming a balanced portfolio, fixed real withdrawals over a 30-year retirement, and a 90% probability of success. “That said, these are conservative estimates for fixed withdrawal rates, and retirees can also use flexible withdrawal systems to enlarge their starting and lifetime withdrawals,” Morningstar says.
Craig J. Ferrantino, founder and president of Craig James Financial Services in Melville, New York, says the 4% rule is still useful as a rule of thumb.
“I think it’s useful,” Ferrantino observes. “It’s a good way to look at life for do-it-yourselfers without having anything more technically available to them. It’s a straightforward rule. It allows people to understand how much they would need to live on in retirement, and the 4% without running out of money. That’s the purpose. It does exclude some things, including future taxation and things like that. But I think it’s been quite useful so far over the many years I’ve been doing this.”
The now-retired Bengen says the rule it is not for everyone. (He has a new book, “A Richer Retirement: Supercharging the 4% Rule to Spend More and Enjoy More.”) Bengen says the 4% rule was never meant to be a cookie-cutter golden rule. “It’s really designed for only the most conservative person to use in retirement planning.” He has updated the portfolio on which he based the rule to be more rounded.
“It’s really important to recognize that the rule is a very limited case that applies to a very, very small number of retirees who want to be ultra conservative and withdraw only at the rate that would allow them to get through anything that’s happened over the last 100 years,” he says.
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