828-569-2785 Get Started!

What is the 4% Rule?

Posted September 29, 2023

View all

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.

What is the 4% Rule?

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.

Here’s a breakdown of how the 4% Rule works:

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.

  1. Simplicity: The 4% Rule provides retirees with a straightforward guideline for managing their retirement withdrawals. It doesn’t require complex calculations or financial expertise.
  1. Historical Success: Back-testing using historical market data showed that following the 4% Rule provides a low-risk way of preserving your portfolio throughout a 30-year retirement period.
  1. Flexibility: The rule allows retirees to increase their annual withdrawals based on the CPI, offering a way for purchasing power to keep up with inflation.

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.

  1. Market Uncertainty: The 4% Rule is based on historical market data, and future market conditions may not mirror the past. Unexpected market downturns or extended periods of low returns could impact the sustainability of this withdrawal rate.
  1. Inflexible: The 4% rule assumes that a retiree’s income needs are flat and will need the same income at age 85 as they would at 65. Our experience shows that a retiree’s spending needs typically decrease as they age, which allows for increased spending in the front half of retirement.
  1. Portfolio Allocation Matters: The success of the 4% Rule is influenced by the allocation of your portfolio. A more conservative allocation may require a lower initial withdrawal rate to ensure sustainability.
  1. Longevity Risk: The 4% Rule is designed for a 30-year retirement, but many individuals today may live longer. It may not provide a sufficient withdrawal rate for those with longer life expectancies.
  1. Reduced Income: The 4% Rule was based on never running out of money regardless of market performance. However, if a retiree is willing to adjust their income on an ongoing basis, they can take a lot more income than the 4% Rule allows for every year.

Final Thoughts

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/.

Thayer Financial, L.L.C. (“Thayer Financial”) is a registered investment adviser offering advisory services in the States of North Carolina, Tennessee, Texas and in other jurisdictions where exempted. Registration does not imply a certain level of skill or training. This website’s presence on the Internet shall not be directly or indirectly interpreted as a solicitation of investment advisory services to persons of another jurisdiction unless otherwise permitted by statute. Follow-up or individualized responses to consumers in a particular state by Thayer Financial in the rendering of personalized investment advice for compensation shall not be made without our first complying with jurisdiction requirements or according to an applicable state exemption.

All written content on this site is for information purposes only. Opinions expressed herein are solely those of Thayer Financial, L.L.C., unless otherwise specifically cited. Material presented is believed to be from reliable sources and no representations are made by our firm as to other parties’ informational accuracy or completeness. All information or ideas provided should be discussed in detail with an advisor, accountant or legal counsel prior to implementation.

Recent Posts

View all

Contact Us


Thayer Financial
439 4th Street SW
Hickory, NC 28602

follow us:


Subscribe to Our Newsletter!

CFP Professional XY Planning Network NAPFA Fee-Only Network