Does the 4% Rule Still Work?

When you see the topic of retirement, you’ll often see a lot of maxims passed around that some financial pundits want you to accept as a “general rule” or a “guideline to follow.”

For example, “Healthcare is the greatest expense in retirement.”

Or how about, “Tax liabilities will be lower in retirement.”

Or “Follow the 4% rule with your retirement money.”

For today’s article, we’re going to leave the topics of healthcare and taxes alone. Instead, we’re going to focus on the “4% rule” and other retirement drawdown strategies.

The “4% Rule” Defined

The “4% rule” outlines a strategy that limits annual withdrawals from your retirement accounts in your first year of retirement. This means that if you retire with $1 million, you could take out $40,000 in year one of retirement. The 4% figure will adjust in year two (and in subsequent years) based on inflation.¹

What’s ironic about the “4% Rule” is that it’s more of a guideline than a rule. The professionals who developed the concept explain that everyone’s situation is different, and a retirement drawdown strategy needs to take a wide variety of factors into account, including the amount of the retirement investment portfolio.

Other Drawdown Strategies²

While the “4% Rule” gets a lot of attention because it’s a catchy phrase, there are a variety of other drawdown strategies that also get mentioned from time to time. See if any of these sound familiar to you.

Put Your Money in Buckets: This strategy asks retirees to place their assets in separate buckets based on when they expect to make withdrawals. A key part of this strategy is to have a bucket with cash and short-term investments available during the early years of your retirement so you can position other assets for the long term.

Spend More Conservatively: If 4% is good, 3% must be better if you’re concerned about outliving your money. This strategy asks retirees to create a list of priorities of their retirement spending, which can involve making difficult decisions.

Maximize Other Income: This approach encourages retirees to cover retirement expenses with other income while leaving retirement assets untouched. While this may help in some instances, remember that just 30% of retirees say they work for pay in retirement. On the other hand, 73% of people plan to work for pay. This perception-versus-reality gap can be a shock for some.

No “One-Size-Fits All” Approach

When we begin creating your retirement strategy, we’ll start by looking at all your sources of retirement income and considering your Social Security benefits. We’ll next ask you a wide variety of questions about your retirement goals and dreams, so we can get a better idea of what income you may need.