Does the 4% Rule Still Work for Retirees?

Planning for retirement involves more than just mapping out your savings strategy. You’ll also need to know how much you can afford to spend once you leave the workforce. In the past, some financial experts recommended that retirees stick with the 4% rule when making withdrawals from a 401(k) or similar retirement account. But this may not be the best guideline for everyone. Here’s what you need to know about the rule.

For help with planning retirement savings and withdrawals, consider working with a financial advisor.

What Is the 4% Rule?

According to the 4% rule, if you withdraw 4% of your savings in the first year in retirement and then adjust your withdrawals for inflation each year thereafter, there’s a good chance your savings will last for at least 30 years.

For example, if you saved $1 million and retire at age 65, you could withdraw $40,000 that first year per the 4% rule. After that, your withdrawals would depend on inflation. But ideally, at this withdrawal rate, you wouldn’t run out of money until you turn 96.

Potential Pitfalls of Following the 4% Rule

When you crunch the numbers, the 4% rule seems like a logical way to decide how much money you can reasonably afford to live off of each year. But it does have some problems. For one thing, this rule was developed two decades ago, at a time when interest rates were higher.

For someone who retired in the ’90s and invested in things like bonds or annuities that were tied to higher rates, the 4% rule could have worked just fine. In today’s rate environment, however, it’s a different story. Those investment returns simply aren’t the same as they once were.

Another issue with the 4% rule is that it doesn’t take into account the fact that people are living longer than ever before. According to the Social Security Administration, the average man turning 65 today can expect to live until age 84.3. The average female, meanwhile, can expect to live until age 86.6. Research has suggested that millennials may live well into their 90s and beyond, so there’s even more pressure to make retirement savings stretch.

Determining Your Ideal Withdrawal Rate

A woman overwhelmed with retirement planning.

Figuring out how much you can reasonably afford to withdraw in retirement involves looking at the bigger picture. For starters, you need to know how much you’ve saved and how much income you can expect to receive from Social Security and other income streams, such as from a part-time job or a rental property investment.

Next, you need to consider how much you need to live on each month. As you add up the cost of housing, food, transportation and insurance, don’t forget about healthcare expenses. As you age, healthcare expenses could begin to eat up more of your monthly budget, so you’ll need to plan ahead in case those costs rise.

Finally, consider how your withdrawal rate could affect your tax liability. If you can take out more than 4%, you need to know whether that’s going to push you into a higher tax bracket. If it does increase your tax bill, reducing your withdrawal rate could help you keep more of what you’ve saved in your pocket.

The 4% Rule Has Been Updated

The 4% rule was introduced by financial planner Bill Bengen in 1994 based on historical market data going back to the 1920s. His research tested what withdrawal rate would have survived every 30-year retirement period in that dataset, including periods like the Great Depression and the stagflation of the 1970s. The answer he landed on was 4%.

Bengen later revisited his original research and raised that number to 4.7%. His updated analysis incorporated a broader mix of asset classes, including small-cap stocks alongside large-cap stocks and bonds, which historically improved portfolio survival rates. Under the revised framework, a retiree with $1 million could withdraw $47,000 in the first year instead of $40,000, then adjust that amount for inflation each year going forward.

The difference between 4% and 4.7% may not sound like much. But over 30 years, it adds up. On a $1 million portfolio, the higher rate puts an extra $7,000 per year into your pocket in year one. That gap compounds as inflation adjustments build on a larger starting number.

Why the Timing of Bad Markets Matters More Than Average Returns

The biggest risk to any fixed withdrawal strategy is not a bad market. Rather, it is a bad market that happens in the first few years after you stop working.

Consider two retirees who both start with $1 million and withdraw $47,000 per year adjusted for inflation. Both experience the same average annual return over 30 years. But one gets the bad years early and the good years late. The other gets the good years early and the bad years late.

The retiree who experiences a 25% drop in year two is pulling $47,000 from a portfolio that just shrank to $750,000. That withdrawal now represents more than 6% of the remaining balance. There are fewer shares left in the account to participate in the eventual recovery. In contrast, the retiree who gets the same 25% drop in year 22 will barely feel it. That’s because 20 years of growth have built a much larger cushion.

This is called sequence of returns risk. It is the reason that two people with identical savings, identical spending and identical long-term returns can end up in completely different financial positions, depending on the order in which those returns arrive.

The 4% rule was designed to survive the worst historical sequences. However, it assumes you never adjust your behavior. In reality, most retirees can and should respond to early downturns. They might consider taking actions such as temporarily reducing discretionary spending, pulling from cash reserves instead of selling stocks at depressed prices or delaying large purchases until their portfolio recovers.

Alternatives to the 4% Rule

If a fixed withdrawal rate feels too rigid for your situation, several other approaches offer more flexibility. The right one depends on how much you have saved, how flexible your spending is, how long you your retirement to last and how much income you receive from Social Security, pensions or other sources.

Guardrails Method

This approach sets an upper and lower boundary around your withdrawal rate. You start with a target percentage, say 5%, and establish rules for when to adjust. If strong market performance pushes your withdrawal rate below 4% of your current portfolio value, you give yourself a raise. If a downturn pushes it above 6%, you cut back.

The guardrails keep you from spending too much in bad years or too little in good ones. The trade-off is that your income varies from year to year, which requires more budgeting flexibility.

Bucket Strategy

The retirement bucket strategy splits your retirement money into separate pools organized by time horizon. Pool #1 is the money you plan to spend in the next 12 to 24 months. You keep that entirely in cash or near-cash, so it is available without any market exposure. Pool #2 covers roughly the next five to six years. It sits in a mix of bonds and conservative funds that offer modest growth without large swings. Pool #3 is everything else, invested for growth over a decade or longer.

You draw your income from Pool #1 and top it off with gains from Pool #2 on a regular schedule. Because your near-term spending money is already set aside, a bad stretch in the stock market does not force you to sell anything at a loss. The structure removes the pressure of watching your spending money fluctuate with the market.

Dynamic Spending

This method ties your annual withdrawal directly to your portfolio’s performance the prior year. In a year when your portfolio grows 12%, you might increase your withdrawal by 5%. Meanwhile, in a year when it drops 15%, you might cut your withdrawal by 10%.

The formula varies, but the principle is the same: spend more when the portfolio can support it and pull back when it cannot. This approach tends to extend portfolio longevity significantly compared to a fixed rate. However, it requires comfort with an unpredictable income stream.

Fixed Dollar With Inflation Cap

With this approach, you withdraw a set dollar amount each year and adjust for inflation, but only up to a maximum percentage. For example, if inflation runs at 6% in a given year, you might cap your increase at 3%.

This protects the portfolio during periods of high inflation while still giving you some purchasing power adjustment. The downside is that it can erode your real spending power during prolonged inflationary stretches.

5 Ways a Financial Advisor Can Help You Plan Retirement Withdrawals

A financial advisor can help you move beyond rules of thumb and build a withdrawal plan based on your actual numbers. Here are five ways they can help.

1. Set a First-Year Withdrawal Amount Based on Your Full Picture

An advisor can look at your total savings, Social Security timing, pension income, tax situation and spending needs to determine what you can safely pull out in year one rather than relying on a generic percentage.

Example: A retiree with $850,000 saved plans to claim Social Security at 67, which will cover $28,000 per year of her $52,000 annual budget. The advisor calculates that she needs to pull $24,000 per year from savings, which is 2.8% of her portfolio. That rate is well below 4%, giving her a significant cushion against market downturns and unexpected expenses.

2. Stress Test Your Plan Against Bad Timing

An advisor can model what happens to your savings if the market drops 20% or 30% in the first two years of retirement. They can then show you whether your withdrawal rate survives those scenarios.

Example: A couple retiring with $1.1 million wants to withdraw $52,000 per year. The advisor runs a simulation showing that a 30% market drop in year one would deplete their savings by age 83. The advisor recommends starting at $46,000 and keeping two years of expenses in cash. That way, they can avoid selling stocks during the downturn.

3. Choose the Right Withdrawal Method for Your Situation

An advisor can compare the 4% rule, guardrails, bucket strategy and dynamic spending approaches and recommend the one that fits your income needs, risk tolerance and willingness to adjust spending year to year.

Example: A retiree with a government pension covering 70% of his expenses wants to use his $600,000 portfolio as a supplement. The advisor recommends a dynamic spending approach because the pension provides a stable income floor and the retiree can afford to vary his portfolio withdrawals based on market conditions without affecting his standard of living.

4. Minimize the Tax Hit on Every Dollar You Withdraw

An advisor can sequence your withdrawals across taxable, tax-deferred and tax-free accounts to keep you in a lower bracket and reduce what you owe each year.

Example: A retiree has $400,000 in a traditional IRA, $200,000 in a Roth IRA and $150,000 in a brokerage account. The advisor recommends pulling from the brokerage account first during the low-income years before Social Security starts at 67 and converting $35,000 per year from the traditional IRA to the Roth while in a low bracket. Saving the Roth for last allows it to keep growing tax-free.

5. Adjust Your Plan as Life Changes

An advisor can revisit your withdrawal rate each year and adjust it based on market performance, changes in expenses, health events or shifts in your income sources.

Example: Three years into retirement, a client’s portfolio has grown from $900,000 to $1.05 million thanks to strong market performance. The advisor recalculates and determines the client can safely increase annual withdrawals by $4,000 without reducing portfolio longevity. The client uses the extra income to fund a trip she had been putting off.

Bottom Line

With today’s changed market, you may wonder: Does the 4% rule still work for retirees? It is possible. This rules calls for withdrawing 4% the first year of retirement and then adjusting from there on out for inflation. But the right approach depends on personal factors. Consider other approaches, such as the bucket strategy or the guardrails method, to see what feels right for you. A financial advisor can also help you come up with a more customized approach.

Retirement Planning Tips

A financial advisor can help you plan for retirement. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area. From there, you can have a free introductory call with your matches to decide who is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
Don’t have access to a 401(k)? Consider opening an IRA or a Roth IRA to save for retirement.