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That ‘Trusted’ 4% Rule For Retirement Might Not Be The Best One To Follow

Dan Rafter5-minute read
March 22, 2022

Worried about running out of money in retirement? You're not alone. It's why so many people rely on concepts like the 4 percent rule, which simply states that you can annually withdraw that amount from your retirement savings without serious consequence.

Be careful, though: That 4 percent rule is really more like a guideline. Depending on how much you've saved before you hit your retirement years, you might be able to withdraw more than 4 percent each year. If you haven't saved enough, though, following this rule could drain your savings too quickly.

Your retirement lifestyle will matter, too. If you want to spend those years traveling, for instance, you might need to save more before you leave the workforce so that you can comfortably withdraw more of your savings. If you're happy to putter around the home and spend time with your grandchildren, you might find that you don't even need to withdraw 4 percent of your retirement savings each year.

The message here? Guidelines such as the 4 percent rule are helpful when determining how much you need to save for retirement. But following them blindly doesn't mean that you'll be guaranteed a financially healthy retirement.

Savings Concerns

A 2019 survey by the American Institute of CPAs shows just how worried many Americans are about having enough money for their retirement years. According to the survey, 30 percent of financial planners said that running out of money is the top concern of their clients.

These fears are why so many people turn to guidelines like the 4 percent rule to help guide them as they determine how much money they’ll need to save.

And the 4 percent rule is, at its core, a solid principle. It’s just not a hard-and-fast rule. You might want to withdraw more money than 4 percent during, say, the earliest years of your retirement. As you age, and you cut back on travel, you might need to withdraw less.

The better choice than relying solely on a strategy as basic as the 4 percent rule? Meet with retirement planners or financial advisors to help you determine more accurately how much money you’ll need for a happy retirement. Then you can figure out how much you need to save or invest during your working years.

To do this, you’ll need to figure what kind of retirement lifestyle you’ll want, how much you’ve already saved, how healthy you are and where you want to live.

Tenpao Lee, professor of economics at Niagara University in the Buffalo area of New York, does not recommend that retirees follow the 4 percent rule. This rule was based on outdated assumptions about inflation and life expectancy, Lee said.

When inflation is high -- and interest rates are also rising -- your retirement portfolio is likely to generate more income. As Lee points out, the interest rate attached to savings accounts was, at one time, in the 5 percent range. If you withdrew 4 percent of your retirement portfolio each year, you’d also add some money to the principal of your investments thanks to the higher interest rates for savers.

Today, though, interest rates attached to savings accounts are far lower: 1 percent or less. As Lee says, depending on where you have invested your retirement savings, you run the risk of running out of money if you withdraw 4 percent each year in retirement. If interest rates are low, the value of your retirement portfolio won't grow as quickly.

However, this could change if you have a portion of your retirement portfolio in a riskier investment class, such as in the stock market. Then, your savings could grow at a faster clip, making withdrawing 4 percent each year a smarter move.

“Should you have a portion of your portfolio in the stock market and take some risks?” Lee asked. “Probably, because you may still have more than 20 years to go if you are 65.”

The rule of thumb was that when you were 65, you should have 35 percent of your retirement savings invested in the stock market before dropping that number to 25 percent when you hit 75. Lee, though, says that today it often makes sense for retirees to have 40 percent of their retirement savings in the stock market when they are 65.

Another Guideline

Edith Muthoni, chief editor of London-based, said that the 4 percent rule is too simplistic. She prefers the multiply-by-25 guideline to help people in their quest to save for retirement.Following this rule, you determine how much you'd need to live on during each year of your retirement. You then multiply this figure by 25 to determine how much you'd need to save in total. For instance, if you think you'll need to withdraw $40,000 every year from your retirement savings, you'd need to save a total of $1 million for your retirement.“The multiply-by-25 rule is more realistic and can be as comprehensive as you would like it to be,” Muthoni said.Of course, this doesn't take into account any other money you’d earn during your retirement years, including dollars from interest, pensions and Social Security. If you’ll have multiple income streams during your retirement years, you won't necessarily have to save as much to be financially stable.Again, the multiply-by-25 rule is just a guideline, one to help you get an idea of how much money you'd need to save to have a happy retirement.

4 Percent Rule Not Flexible Enough

Adam Beaty, a certified financial planner at Bullogic Wealth Management in Pearland, Texas, agrees that the 4 percent rule is too simplistic. That's because retirees’ financial needs change as they move through their retirement years, and the 4 percent rule doesn't account for these changes, Beaty said.

Beaty refers to the first years of your retirement as your go-go years, when you are still young and want to use your new freedom to enjoy life. These years might be full of travel, activities and new hobbies, all of which can be expensive. During this phase of retirement, you will spend the most money, Beaty said.

Next come what Beaty calls the slow-go years, when you’re getting older and you’re starting to reduce travel, activities and hobbies. You'll start to spend less money during these years.

Then there are the no-go years, often about 20 years after you retire. As you get older, you'll put a stop to your travel and new activities. You'll also spend far less each year, except for medical costs.

Beaty said that if you adhere strictly to the 4 percent rule, you won't be able to adjust your withdrawals to meet your lifestyle at different points in your retirement years.

“By keeping the same withdrawal rate throughout retirement, you are robbing yourself of being able to spend money on the fun things during your go-go years,” Beaty said.

Many retirees might be able to withdraw more than 4 percent each year without worrying about draining their funds, Beaty said. These retirees might enjoy their retirement years less because they aren't spending their money on travel and activities.

“I want your last check in this world to bounce,” Beaty said. “Money left over that goes above and beyond what you wanted to give to heirs is life left unlived. The whole purpose of retirement is distribution, to spend your money, not accumulate more.”

Dan Rafter

Dan Rafter has been writing about personal finance for more than 15 years. He's written for publications ranging from the Chicago Tribune and Washington Post to Wise Bread, and