The 4 Percent Retirement Rule Is Not Dependable

Why the 4% Retirement Rule Is Not Dependable

Updated on Jun 13 2018


The ‘4 percent rule’ has long been the standard for retirement plan withdrawals best practices. As times change, this practice is far from perfect, though.

We all know we’re supposed to ‘save as much money as possible for retirement,’ but there are many variables with the blanketed statement. For example, everyone has a unique situation as to their lifestyle, income, spending habits, cost of living, geographic location costs and inflation. The reality is that many Americans don’t know how much of a nest egg is really enough in terms of a comfortable retirement, which is why financial planning is so important. For years, experts have relied on the 4 percent rule to help determine how much savings is truly adequate; today it’s not quite as dependable.

Flaws in the 4% Retirement Rule

The rule states that if you begin by withdrawing four percent of your nest egg’s value during your first year of retirement, and then adjust subsequent withdrawals for inflation, you’ll avoid running out of money for thirty years. The 4 percent rule has been tested and proven successful time and time again, however, today is different for a multitude of reasons:

1. The Rule Doesn’t work With All Investment Portfolio Mixes

The four percent rule makes assumptions about your investment mix. The rule is designed for portfolios with a relatively equal mix of stocks and bonds; specifically, 60 percent stocks and 40 percent bonds. There is some flexibility with this formula, however if your risk tolerance is such that your investments are heavily skewed toward one option over the other, everything could be thrown off.

For example, if you’re the risk-averse type and have 80 percent of your portfolio in bonds, you won’t see the same level of growth as someone with a more stock-heavy investment mix. On the flip side, if you’re an aggressive investor with 90 percent of your assets in stocks, you’ll probably see more rapid growth, but you’ll also be exposed to a greater degree of market volatility, which could put your savings’ sustainability at risk if you’re forced to take withdrawals during downturns.

Of course, this isn’t to say that you should adjust your investments to align with the 4 percent rule’s assumptions. Ultimately, you’re better off sticking to a mix that suits your risk tolerance level and goals. Just be aware, however, that if your portfolio looks nothing like that 60/40 split, the 4 percent rule may not work for you.

2. The 4 Percent Retirement Rule is Out-of-Date

The standard mix of stocks and bonds rule was also developed during the mid-1990s, at which point bond interest rates were significantly higher than what they’ve been for the past twenty or so years. In other words, bonds can’t generate the same sort of growth today that they did in years past. Generally speaking, the rule’s formula is outdated. Not only that, but the Federal Reserve raised interest rates three times last year alone, so we might see bond values begin to drop even lower.

3. Retirement Is Different for Everyone

The 4 percent rule is designed to make your retirement savings last for 30 years. Longevity is difficult to calculate, though, as everyone has a different life span. Not only that, the majority of Americans are living longer these days, cutting the 30-year retirement short. Some of us may not need three full decades’ worth of retirement income, but others might need more. For example, some seniors have to retire early for a multitude of reasons, such as health issues, caregiving or inability to find work. There are many variables to consider which is why people need to plan for their own unique situations when it comes to investment time horizon.

During the first half of 2017, 19 percent of 70- to 74-year-olds were still employed according to the Social Security Administration. That’s roughly eight percent more than the number of employed adults in that age group back in the mid-1990s, when the rule was first introduced. It is always nice to be optimistic, but it’s important to remember that only about 10 percent of U.S. seniors will end up living until 95, so if you work until your mid-70s, you can probably plan for a much shorter retirement.

Informed Financial and Retirement Planning

The four percent retirement rule may be a basic place to start, however strategic financial planning will help you achieve not only a realistic financial plan, but also financial peace of mind that you’ll be covered in your golden years.

Customized investment portfolios, depending on your age, income and risk desired will help you achieve your goals. Having a trusted expert help guide you with your investments and financial strategy, as well as educating you about commonly overlooked benefits, such as Social Security bonuses, can help you achieve retirement planning success.


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