As you near retirement and begin to try to calculate how much income you may have, you're going to come across several rules of thumb that have circulated for years. One of them is the '4 percent rule'. Here's what it is and what you should do with it.
What is the 4% Rule in Retirement?
The 4% retirement rule refers to your withdrawal rate: the annual amount of your starting portfolio value that you might withdraw from a portfolio of stock and bonds in retirement.
For example, if you have $100,000 when you retire, the 4% rule would say that you could withdraw about 4% of that amount, or $4,000, the first year of retirement, and increase that amount with inflation, and that the probability is pretty high (95%) that the money would last for at least 30 years, assuming your portfolio allocation was 50% stocks/50% bonds.
History of the 4 Percent Rule
The 4% rule started to circulate after a 1998 paper that is referred to as the Trinity Study. The actual name of the paper is Retirement Savings: Choosing a Withdrawal Rate that is Sustainable.
Although the 4% rule has become quoted as a “safe withdrawal rate” to use in retirement, nowhere in the paper does it refer to it this way.
- A few of this paper’s conclusions that I find interesting are:
- "Most retirees would likely benefit from allocating at least 50% to common stocks."
- "Retirees who demand CPI-adjusted withdrawals during their retirement years must accept a substantially reduced withdrawal rate from the initial portfolio."
- "For stock-dominated portfolios, withdrawal rates of 3% and 4% represent exceedingly conservative behavior. "
Updates to the 4% Rule
The authors of the Trinity Study published updated research in the Journal Of Financial Planning in 2011. You can find it at: Portfolio Success Rates: Where to Draw the Line.
The conclusion did not meaningfully change. In it they say,
“The sample data suggest that clients who plan to make annual inflation adjustments to withdrawals should also plan lower initial withdrawal rates in the 4 percent to 5 percent range, again, from portfolios of 50 percent or more large-company common stocks, in order to accommodate future increases in withdrawals.”
Wade Pfau, an academic with a specialty in retirement income, commented on this study in his Retirement Researcher Blog at Trinity Study Updates.
- A few of the points Wade makes are:
- “Trinity study does not incorporate mutual fund fees.”
- “The 4% rule has not held up nearly as well in most other developed market countries as it has in the U.S.”
- ”The Trinity study considers retirement lengths of up to 30 years. Please keep in mind that for a married couple both retiring at age 65, there is a good chance for at least one of the spouses living longer than 30 years.”
What Do I Think of the 4% Rule?
The 4% rule in retirement should not be referred to as a rule. I’ve heard one journalist refer to these things as “rules of dumb” rather than “rules of thumb”.
I think these “rules” should be referred to as general guidelines. If you want a general idea of how much retirement income your savings can support, the 4% rule tells you that depending on your desire to have your retirement income keep up with inflation, you can likely withdraw about $4,000 - $5,000 per year for every $100,000 you have invested, assuming you follow a specific portfolio mix with about 50% of your portfolio in stocks (when I say stocks I mean a broadly diversified portfolio of stock index funds).
Should You Use the 4% Rule?
Although the 4% retirement rule may provide a general guideline, I don’t think anyone should use it to actually decide how much to withdraw each year in retirement.
As a matter of fact, as long as I have been practicing (since 1995 - before the original Trinity Study was published) I have yet to see a retirement income plan where we based withdrawals on 4% of the portfolio value.
Instead, each upcoming retiree has their own plan based on their other expected sources of income, types of investments used, expected longevity, expected tax rate each year, and numerous other factors. When you build a smart retirement income plan, it may lead to more withdrawals in some years, and less in others.
Another reason the 4% rule becomes moot is that once you reach age 70 ½ you are required to take withdrawals from your IRAs and each year you get older, you must withdraw a higher amount. Granted, you don’t have to spend it – but you do have to withdraw it from the IRA, which means paying taxes on it. These required minimum distributions are specified by a formula and the formula will require you to take more than 4% of your remaining account value as you get older.
Does the 4% Rule Still Work as a Guideline?
In a 2013 paper, The 4 Percent Rule is Not Safe in a Low Yield World authors Michael Finke, Wade Pfau, and David Blanchett state that,
- “The success of the 4% rule in the U.S. may be an historical anomaly, and clients may wish to consider their retirement income strategies more broadly than relying solely on systematic withdrawals from a volatile portfolio.”
- “The 4% rule cannot be treated as a safe initial withdrawal rate in today’s low interest rate environment.”
This paper suggests that expectations may need to be revised as prior studies were based on historical data where bond yields and dividend yields on stocks were much higher than what we are seeing today.
A non-academic article explaining this can be found at With low bond yields, ‘4 percent retiree’ rules doesn’t always apply.