What is the 4% Rule?
Posted September 29, 2023
Posted September 29, 2023
As you plan for your retirement, one of the most critical questions you’ll face is managing your finances to ensure a comfortable and secure retirement. The “4% Rule” is a widely used guideline that offers retirees a framework for making withdrawals from their investment portfolios while aiming to make their savings last throughout their retirement years.
First, you’re likely asking what is the 4% Rule. The 4% Rule is a guideline developed by financial planner William Bengen in the early 1990s. It provides a simple strategy for determining a sustainable withdrawal rate from your retirement savings over a long retirement period, typically 30 years. The rule suggests that you can safely withdraw 4% of your initial retirement portfolio balance in the first year of retirement and adjust that amount for inflation each subsequent year.
So, what does it look like to apply the 4% Rule to your retirement plan?
Start with 4%: In the first year of retirement, withdraw 4% of your retirement savings. For example, if you have $1 million saved, your initial withdrawal would be $40,000.
Adjust for Inflation: Increase your withdrawal amount each year to account for inflation. The most commonly used measure of inflation is the Consumer Price Index (CPI). If the inflation rate is 2%, you would withdraw $40,800 in year two.
Recalculate Annually: Repeat this process yearly and recalculate your withdrawal amount with the cost of living adjustment.
Pros of the 4% Rule
As with any “rule” when it comes to financial planning, there are pros and cons that you will need to examine and discuss with your financial advisor. Here are three pros to consider when applying the 4% Rule.
Cons of the 4% Rule
On the flip side, there are also cons you will want to consider when seeing if the 4% Rule is something you will want to incorporate into your financial plan.
If you’re to take one thing away about the 4% Rule, we believe it’s essential to recognize that it’s not a one-size-fits-all solution, and individual circumstances and market conditions can impact its effectiveness. To make the most of your retirement savings, it’s best to work with a financial advisor with your best interest in mind 100% of the time.
Thayer Financial is proud to work as a fiduciary and help its clients plan for a successful and comfortable retirement. If you want to learn more about producing the maximum income during your retirement or other retirement planning strategies, the Thayer Financial team would love to connect. Book your consultation with the team online at https://www.thayerfinancial.com/contact/.
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