What is the 4% rule in retirement?

By Jason R. Friday, CFP®, MPAS®, RICP®, CMFC, Head of Financial Planning | Citizens Wealth Management

_{As Head of Financial Planning, Jason is a strategic partner who is responsible for developing the strategy, managing the planner teams, and coordinating personal financial planning activities across Citizens Wealth Management to help clients navigate and grow in changing circumstances.}

Planning for retirement means answering a big question: How much can I spend each year without running out of money?

The 4% rule is a commonly referenced guideline for estimating how much you can safely withdraw from your retirement savings each year. Originally developed to help retirees avoid outliving their money over a 30-year retirement, it offers a simple formula: withdraw 4% of your savings in the first year of retirement, then adjust that amount annually for inflation.

While the rule provides a helpful starting point, it's not a replacement for a personalized retirement income strategy. Learn how the 4% rule works, when it's useful and why a more tailored approach is recommended.

Understanding the 4% rule

The 4% rule was first introduced by financial advisor Bill Bengen in 1994. His goal was to create a straightforward method for determining a sustainable withdrawal rate.

Using historical market data, Bengen tested various withdrawal scenarios. He concluded that a retiree, with a portfolio split evenly between U.S. large-cap stocks and intermediate-term government bonds, could withdraw 4% of their savings in the first year of retirement. That amount could then be adjusted for inflation annually, with a low probability of running out of money over a 30-year period.

The approach became popular due to its simplicity and ability to give retirees a clear benchmark for retirement income withdrawals.

How the 4% rule works

Assuming a $1 million portfolio, here’s how retirement income withdrawals would work following the 4% rule:

• Year one: You withdraw 4% of your total savings, or $40,000.
• Year two: You increase that $40,000 by the rate of inflation. If the inflation rate was 3%, you'd withdraw $41,200 the following year.
• Year three and beyond: You increase the prior year’s withdrawal amount by the inflation rate. If the inflation rate was 3% in year three, you’d withdraw $42,436.

You can also use a variation of the rule to estimate your retirement savings goal. For example, if the goal is to generate $60,000 in income from your retirement savings, multiply that amount by 25 to calculate the savings target.

• $60,000 x 25 = $1.5 million

Withdrawing 4% from $1.5 million would result in $60,000 as your year one retirement withdrawal amount. Like the 4% rule, the "multiple by 25" shortcut is useful for setting a basic retirement savings target.

Benefits and limitations of the 4% rule

The biggest strength of the 4% rule is its simplicity. It provides a clear, easy-to-calculate reference point. Since it has been tested based on historical data, it also provides some reassurance knowing that the approach could withstand a mix of past market conditions.

However, the rule has important limitations:

• It's not personalized: It doesn't consider your lifestyle goals, risk tolerance, portfolio performance, or other personal factors.
• It lacks flexibility: Expenses are not evenly distributed throughout retirement. Regardless of the inflation adjustments, you may need more income in some years and less in others.
• It's based on a specific portfolio: The original model was based on a 50/50 stock-bond allocation. If your portfolio allocation is more conservative or aggressive, your results may differ.
• It ignores taxes and fees: Your actual retirement income could be lower than expected if you’re withdrawing from tax-deferred or taxable accounts.

While the 4% rule is a helpful guideline, it's not a comprehensive retirement planning solution. For example, many retirees have a mix of investment accounts, including traditional IRAs, 401(k)s, Roth IRAs, and taxable accounts. This raises important questions about which accounts to draw from first, IRS withdrawal rules, how taxes affect income, and how to structure withdrawals efficiently.

Timing Social Security benefits is another key consideration. Delaying Social Security until age 70 can increase your monthly benefit, but doing so may require larger withdrawals from savings in the early years of retirement or working longer. For married couples, coordinating Social Security strategies is even more nuanced and may significantly impact long-term financial outcomes.

These are a small sample of the factors that highlight why the 4% rule is not a substitute for a personalized retirement plan.

Why personalized planning matters

Every retirement journey is different. Your income needs, lifestyle goals and comfort with risk all influence what a sustainable plan looks like for you. Personalized planning helps align your withdrawal strategy with your unique circumstances and gives you the flexibility to adjust as life evolves.

Flexible and modern approaches to retirement income planning consider factors such as:

• Cash flow modeling: A year-by-year projection that shows how your income and expenses change over time, adjusting for inflation, taxes, and lifestyle changes.
• Variable spending patterns: As spending needs shift during certain periods of retirement, so does your retirement plan.
• Tax efficiency: The sequence and source of retirement income withdrawals are structured to help manage the long-term tax burden.
• Scenario and stress testing: Planning for the unexpected allows you to evaluate how your strategy might perform under different conditions, such as a market downturn, rising inflation, or major health expenses. By identifying potential gaps in advance, you can make adjustments that strengthen your plan against retirement risks.
• Guaranteed income strategies: Social Security and pensions can provide a stable foundation of retirement income. Income annuities may be able to supplement it to help cover other essential monthly expenses and reduce longevity risk.

Personalized planning is dynamic, data-driven and based on your unique situation. This in-depth process can give you a clearer view of how your plan holds up across a range of possibilities, helping you move forward with greater confidence.

Get professional guidance on your retirement strategy

While the 4% rule can be a helpful reference point, it doesn’t account for your full financial picture or complex decisions that can shape the quality of your retirement. Relying on it alone could leave important questions unanswered and opportunities overlooked.

Whether you're a few years from retirement or already there, a Citizens Wealth Advisor* can help you create a strategy that’s tailored, flexible, and built to last. To get started with a plan that brings clarity and confidence to your retirement years, connect with a Citizens Wealth Advisor today.

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