Does the 4% rule work for today’s retirement? (2024)

FAQs

Does the 4% rule work for today’s retirement? ›

The 4% rule comes with a major caveat: It's not really a “rule” since everyone's situation is different. If you have a large retirement investment portfolio, you might not need to spend 4% of it every year. If you have limited savings, 4% might not come close to covering your needs.

The biggest problem with the 4% rule is that life is almost never as simple as we'd all hope. There may be some years in retirement that you need more than the rule allows and some years that you need less. This could be caused by moving locations, health problems, or other life changes.

Ivanna Hampton: New retirees could kick off their golden years with a familiar number, 4%. A trio of Morningstar researchers analyzed starting safe withdrawal rates from an investment portfolio to fund retirement. The future looks good, and a little flexibility could make it even better.

What is this? Despite having more historical data (through 2022), the safe withdrawal rate is still 4%.

Your yearly expenses x 25 = A BIG NUMBER

THEN if I pull no more than 4% of that number out each year to live on in retirement I 'should' preserve the remainder of my investment, it won't deplete, and I won't run out of money.

While the 4% rule can provide a helpful starting point for retirement planning, it's not a one-size-fits-all solution. Factors such as market fluctuations, medical expenses and personal tax rates must be considered when determining a safe withdrawal rate.

Bengen found that retirees could safely spend about 4% of their retirement savings in the first year of retirement. In subsequent years, they could adjust the annual withdraws by the rate of inflation. Following this simple formula, Bengen found that most retirement portfolios would last at least 30 years.

The 4% rule comes with a major caveat: It's not really a “rule” since everyone's situation is different. If you have a large retirement investment portfolio, you might not need to spend 4% of it every year. If you have limited savings, 4% might not come close to covering your needs.

This rule is based on research finding that if you invested at least 50% of your money in stocks and the rest in bonds, you'd have a strong likelihood of being able to withdraw an inflation-adjusted 4% of your nest egg every year for 30 years (and possibly longer, depending on your investment return over that time).

“This rule protects the retirement investors from improper investment recommendations and harmful conflicts of interest. Retirement investors can now trust that their investment advice provider is working in their best interest and helping to make unbiased decisions.”

Can I retire at 62 with $400,000 in 401k? ›

If you have $400,000 in the bank you can retire early at age 62, but it will be tight. The good news is that if you can keep working for just five more years, you are on track for a potentially quite comfortable retirement by full retirement age.

If you have more than $1 million saved in retirement accounts, you are in the top 3% of retirees. According to EBRI estimates based on the latest Federal Reserve Survey of Consumer Finances, 3.2% of retirees have over $1 million in their retirement accounts, while just 0.1% have $5 million or more.

Safe Withdrawal Rate

Using our portfolio of $400,000 and the 4% withdrawal rate, you could withdraw $16,000 annually from your retirement accounts and expect your money to last for at least 30 years. If, say, your Social Security checks are $2,000 monthly, you'd have a combined annual income in retirement of $40,000.

We did the math—looking at history and simulating many potential outcomes—and landed on this: For a high degree of confidence that you can cover a consistent amount of expenses in retirement (i.e., it should work 90% of the time), aim to withdraw no more than 4% to 5% of your savings in the first year of retirement, ...

Does a 401(k) recover after a recession? Your 401(k) can recover after a recession if you give it enough time to regain losses. Historically, the stock market has always recovered from recessions to eventually reach new highs. In fact, your 401(k) may begin to recover before the recession ends.

To help you stay on track, we suggest these age-based milestones: Aim to save at least 1x your income by age 30, 3x by 40, 6x by 50, and 8x by 60. Your personal savings goal may be different based on various factors including 2 key ones described below.

The Rule of 70 is a calculation that determines how many years it takes for an investment to double in value based on a constant rate of return. Investors use this metric to evaluate various investments, including mutual fund returns and the growth rate for a retirement portfolio.