How Long Your Money Could Last Using the 4% Rule

The 4% rule offers a straightforward framework to estimate your financial runway. This widely referenced guideline suggests withdrawing 4% of your retirement portfolio in your first year of retirement, then adjusting that amount annually for inflation in subsequent years. Originally developed in the 1990s by financial advisor William Bengen, the rule aims to create a sustainable withdrawal strategy that balances current income needs with portfolio longevity. While the 4% rule traditionally projects that your money could last approximately 30 years, your actual results may vary based on several factors, including market performance, asset allocation and personal spending patterns.

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?

Establishing a withdrawal rate for your retirement savings provides a structured approach to creating sustainable income. Rather than guessing how much you can safely spend each month, a withdrawal rate gives you a systematic method for drawing down your assets. This approach helps ensure your retirement savings last throughout your lifetime, which is particularly important as life expectancies continue to increase.

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.

Perhaps the most compelling reason to use a withdrawal rate is the psychological comfort it provides. Knowing how long your money could last using the 4% rule or a similar approach alleviates one of retirement’s greatest anxieties: the fear of running out of money. This peace of mind allows retirees to focus on enjoying their post-working years rather than constantly worrying about their finances.

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 returns rose, in 2024 the Morningstar-calculated safe rate is 3.7%.

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 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 enjoyment require making personalized adjustments to reflect market trends and spending habits.

How to Make Your Retirement Savings Last

Making your retirement savings last requires careful planning beyond simply following the 4% rule. Start by developing a withdrawal strategy that accounts for your specific needs and circumstances. Consider factors like your health, lifestyle expectations, and potential longevity when determining how much you can safely withdraw each year. 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 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.

Flexibility is crucial for making retirement savings last. During years when your investments perform well, you might maintain or slightly increase withdrawals. When markets decline, consider temporarily reducing discretionary spending to preserve your principal. This dynamic approach helps protect your nest egg during volatile periods.

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 abilities, getting a checkup with a financial advisor provides a useful perspective and ideas you may miss alone. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with 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.