It’s helpful guidance for some people, but I don’t see it working for me.
As of 2022, the average American aged 65 to 74 had about $609,000 in retirement savings, per the Federal Reserve. But no matter how much savings you’ve accumulated for your senior years, it’s important to manage that money wisely. And that means stretching it so it doesn’t run out.
To that end, you may have been advised by a friend, professional, or words on the internet to stick to the 4% rule when tapping your retirement nest egg. The 4% rule tells you to withdraw 4% of your balance your first year of retirement and then adjust future withdrawals for inflation. If you stick to that plan, your savings have a good chance of lasting for 30 years.
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I’m certainly not going to tell you that the 4% rule is a load of garbage. And it may very well work for some people. But here are three reasons I’m just not a fan.
1. It makes assumptions about your retirement date
The 4% rule is designed to help your nest egg last for 30 years. And that time frame may be suitable for the typical retiree. But it may not be applicable to everyone.
I, for example, hope to keep working as long as possible. Other folks may want to retire in their late 50s, once they’re able to take withdrawals from an IRA or 401(k) plan without a penalty.
The 4% rule doesn’t do a great job of accounting for early or late retirements. And if you end up on either end of the spectrum, it may not be the best strategy for you.
2. It doesn’t give you much wiggle room in your annual spending
The 4% rule basically keeps your withdrawals static from one year to the next. Sure, there are adjustments for inflation. But a typical rate of inflation over the last couple of decades is 2%. So all told, that’s not a huge jump in the amount of money you’re taking out and using year after year.
The problem, though, is that you may have periods during retirement when you need access to more money. If you own a home, there may be a year when you have to make repairs. Limiting yourself to 4% of your original retirement-plan balance plus an inflation adjustment may not cut it — and could cause you a lot of financial stress.
Also, you may want to tap your savings to a larger degree when you’re younger, to take advantage of your good health. One thing I hope to get to do when I retire is travel. But I may want to front-load some of those adventures to the earlier stages of retirement. The 4% rule doesn’t really give me the flexibility to do that.
3. It doesn’t accommodate a more aggressive or conservative portfolio
The 4% rule assumes that your investment portfolio in retirement has a fairly even split between stocks and bonds. But not every portfolio looks like that. And I’m not sure what mine will look like, either.
I do plan to scale back on stocks in retirement because they can be risky. But depending on the other assets I end up with, I may decide to keep a larger chunk of my investments in stocks than the typical retiree. Or I might chicken out and dump most of my stocks; it’s hard to say. But I feel I need a withdrawal strategy that caters more to what my specific portfolio looks like.
I’m carving out my own path
It’s not a bad idea to use the 4% rule as a starting point when establishing a withdrawal strategy for your retirement savings. And as of now, that’s what I plan to do.
But I also intend to take my personal circumstances into account when deciding how to manage my nest egg. And I want to keep my options open so that my withdrawals could vary substantially from one year to another.
If you have doubts about the 4% rule, don’t force yourself to stick to it. Instead, do what I’m doing — either on your own, or with the help of a financial advisor if you feel you could use some guidance. You may find that a customized strategy not only brings you more peace of mind, but improves your quality of life as a retiree.