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How Long Your Money Could Last Using the 4% Rule


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. Though popular, it has faced criticism in recent years due to forecasts for lower returns on investments. But some financial experts say that the 4% rule may be safe again due to higher bond yields. A financial advisor can objectively analyze your full financial picture and risk tolerance to create a withdrawal and investing approach to balance current income with longevity.

Why Use a Withdrawal Rate?

Retirees face complex decisions about converting savings into sustainable income. Spend too much early on through withdrawals and savings could run dry. Withdraw too little and retirees miss out on their vision for this phase of life.

Financial experts say determining a safe withdrawal rate helps balance these extremes. This rate indicates, based on assumptions, how much retirees can take from investments annually while maintaining high odds that their savings will last their lifespan. It provides, if not an inflexible plan, at least a starting point for consideration.

Withdrawal rate strategies factor in the amount of your savings, the asset allocation you employ, your tolerance for risk and your time horizon, which in the case of retirement planning essentially is how long you expect to live. All these factors call for regular reevaluation as the markets and your needs shift.

The 4% Rule for Withdrawals

A senior couple calculating how many years their nest egg could last with the 4% rule.

The 4% rule emerged in 1994 when advisor William Bengen found that a 50%-75% stock allocation could safely support 4% initial withdrawals, with subsequent annual increases for inflation, over 30-year retirements. Testing with historical data across decades encompassing events like the Great Depression supported the finding.

The rule became widely popular with financial advisors and retirement savers but in recent years doubts about its validity have risen. Specifically, lower forecasts for returns on investments indicated the 4% rule might need to be adjusted down. For instance, a few years ago, Morningstar began an annual analysis of safe withdrawal rates. In 2021, the investment firm pegged the safe rate at 3.3%. In 2022, 3.8% was determined to be the safe rate. More recently, as fixed income return rose, in 2023 the Morningstar-calculated safe rate moved back to 4%.

The 4% Rule in Action

Using the 4% rule, someone with $1 million saved would withdraw $40,000 the first year under the 4% rule, then give themselves raises aligned with inflation. So, if overall prices rose 3% the next year, they would take out $41,200 and so forth. Estimates on how long this withdrawal rate would take to exhaust a portfolio can vary based on the assumptions being used, but projections by major investment firms typically employ the Monte Carlo simulation that accounts for a great deal of uncertainty.

Referencing the same analysis from above, Morningstar projects that a 4% initial rate coupled with inflation adjustments indicates a 90% chance of a 50-50 portfolio that is half equities and half fixed income lasting 30 years. This is a very high confidence rate with an asset allocation approach that is more conservative than the 60-40 equities-fixed income ratio used in many portfolios. Due to Morningstar’s forecast of generally lower returns for stocks, however, portfolios containing 20% to 40% equities delivered the top outcome in this analysis.

Comparatively, JPMorgan research shows that a 60-year-old individual with $30 million and reasonable return estimates has basically 100% odds of depletion by age 90 when spending 4% yearly. This result is similar to Morningstar’s finding.

Although these studies support the 4% rule, that doesn’t mean it’s wise to adopt it without reservation. Financial advisors recommend the customization of withdrawal rates based on individual factors like age, risk attitudes and other income sources.

Limitations of the 4% Rule

The 4% rule relies on historical data and, of course, past performance does not guarantee future results. Many events including pandemics and military conflicts are hard to predict with certainty but can have profound and sometimes lasting effects on market returns and safe withdrawal rates.

The 4% rule also does not make special provisions for more predictable eventualities including taxes, investment fees and retirees’ tendency to significantly reduce spending in their later years. It assumes rigid increases tied to inflation without reflecting actual portfolio performance. It stems from a standardized 50%-75% portfolio that may differ from the asset allocation typically used.

Importantly, it carries an extremely high confidence level with essentially no chance of failure over 30 years. This requires retirees to spend less than they could and have a less comfortable lifestyle than they could with a less rigorous confidence level.

Ultimately, a standardized withdrawal rate, whether 4% or some other figure, may be primarily for general guidance on savings needs and early withdrawal rates. Maximum sustainability and enjoyability requires making personalized adjustments to reflect market trends and spending habits.

Making Your Savings Last

Crafting a sustainable and enjoyable retirement calls for more than relying on a standardized withdrawal rate. Experts offer ways to make retirement funds endure beyond the 4% rule. These can include:

  • Consider partial inflation adjustments or spending decreases over time rather than rigid 4% raises. Most retirees’ spending declines as they age.
  • Institute guardrails to limit overspending or underspending based on market shifts. This approach increases or reduces spending by a percentage of the market’s change up or down over the course of a year.  
  • Employ a required minimum distribution (RMD) approach that automatically adjusts withdrawal percentages based on portfolio value and life expectancy.
  • Employ other income sources like pensions, Social Security and annuities to create a secure floor to cover essentials.
  • Work longer in pre-retirement to maximize assets.
  • Regularly review and revise strategies based on needs and performance.

Bottom Line

A senior couple adjusting their retirement withdrawal strategy based on the 4% rule.

The 4% guideline for retirement withdrawals, which involves taking out 4% of savings the first year, then adjusting for inflation annually, provides a useful starting point for income planning. But given lower return outlooks, rising lifespans and individual variables, experts say flexibility and customization is essential to make money last. Relying solely on fixed historical assumptions without regard for evolving personal situations sets up failure. Ultimately, 4% is more appropriate as a reference rather than a rigid requirement, and is likely best used by adjusting along the way.

Financial Planning Tips for Beginners

  • Even if you feel confident in your own abilities, getting a checkup with a financial advisor provides useful perspective and ideas you may miss alone. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
  • Consider using SmartAsset’s free, easy retirement calculator to get a quick estimate for how long your money could last based on your specific savings, spending and investments.

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