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What Is the Rule for Retirement Withdrawals?

What Is the Rule for Retirement Withdrawals?

| July 11, 2023

How much you should save for retirement depends on how much you plan to spend once you get there. 

Historically, financial advisors have recommended the “4% rule,” which means that you should plan to spend 4% of your retirement savings in your first year. Learn how the rule works and how you might need to adjust your thinking as you enter your retirement years.

What Is the 4% Rule?

The 4% rule goes back to 1994 when William Bengen advocated this retirement withdrawal strategy. Basically, you should expect to withdraw 4% from your retirement plan for your first year, then adjust your subsequent withdrawals for inflation.

For example, if your retirement account contains $1 million, the 4% rule would prompt you to withdraw $40,000 in your first year. 

But that’s only for the first year. After this, retirees should make adjustments based on the rate of inflation. For instance, if the rate of inflation is 2%, then you would multiply last year’s distribution by 1.02 — in this case, $40,800. And if in the following year, inflation rose to 10%, you would multiply your original distribution by 1.1 (giving you $48,400).

How Long Will My Retirement Savings Last Under the 4% Rule?

According to Bengen, following this plan would allow your retirement savings to last roughly 30 years. That’s because the money remaining in your retirement account will continue to grow through interest. While the rate of growth will diminish over time, retirees can still expect to see their wealth grow during their retirement years.

In fact, Bengen’s analysis discovered that a portfolio composed of 50% stocks and 50% bonds could last as long as 50 years following the 4% rule. 

Is the 4% Rule Still Valid?

Today, many economic experts are skeptical that the 4% rule remains valid. This is due to several mitigating factors.


Withdrawing 4% of your retirement account may not be nearly enough to keep up with inflationary pressures. While Bengen’s 4% rule accounted for inflation in subsequent years, it’s still based on a 4% initial base, which may prove inadequate, especially in light of America’s recent economic turbulence.

Market Risk

Because retirement portfolios are dependent on the market, retirees face what’s known as a “sequence of returns” risk. This means that market volatility could jeopardize the total amount in your retirement portfolio, leaving you with an amount that won’t last your full 30 years.

Withdrawal Fees

Many retirement accounts are actively managed by a broker or advisor, some of whom can charge a fee depending on the number of assets under management (AUM). There can also be fees associated with distributions, which can cut into the actual amount you withdraw during retirement.

Withdrawal Rates Can Vary

During a bear market, retirees might consider adjusting their withdrawal rate to minimize the rate at which they use their nest egg. 

For example, it may be necessary to reduce the annual withdrawal by 5% during a turbulent period — meaning you’d reduce your withdrawal multiplier by 0.05. This doesn’t invalidate the 4% rule, though it shows that the rule demands some flexibility.

Why the 4% Rule Still Works

It’s important to understand that while the 4% rule has all of the above limitations, it still forms a valid baseline on which to plan your retirement. 

Alternatively, you can simply add up your expected monthly expenses, then multiply that factor by 12 to determine how much you’ll need to withdraw from your account each year. But this method is just as vulnerable to the factors listed above, and it won’t necessarily address the question of rising inflation.

The 4% rule still permits retirees to supplement their income in other ways, including:

  • Social Security disbursements
  • Stock dividends
  • Income from rental properties, etc.
  • Other income from retirees re-entering the workforce
  • Reverse mortgages
  • Additional investments such as bond funds

Also, many older Americans choose to downsize once their kids are grown and out of the house. The sale of your home can provide you with the money you need to purchase a smaller property or move near your family, and the money remaining from the sale can augment your retirement savings.

Advice You Can Bank On

As you can see, the 4% rule isn’t absolute, but it still provides a helpful baseline to judge your retirement needs. Now it’s time to plan. 

Let Good Life Financial Advisors of Morehead City, NC, provide advice for setting up a long-term savings and retirement plan. Contact us today to set up a no-obligation discovery meeting. Let us learn more about you, and you can find out why we may be a good fit for your needs.