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Evidence the 4 Percent Rule is Dwindling

Ever since a California financial planner named William P. Bengen proposed it in 1994, retirees have relied on what’s known as the 4 percent rule. It states that if they withdraw 4 percent of their nest eggs the first year of retirement and adjust that amount for inflation thereafter, their money would last at least 30 years.

But now, there is more evidence that the 4 percent rule is no longer a reliable way to determine your how many years your retirement savings will last. To recap, the rule states that annually withdrawing 4 percent from your retirement account may allow your account to remain sustainable for the rest of your life. Theoretically, you would be able to live on 4 percent of your retirement assets every year until you die, without your account ever being in danger of running out.

But now, some factors are compromising the believability of the 4 percent rule. It started with the volatility of the stock market, followed by a rise in inflation. Then, mortality factors (the reality that people are living longer today) began to compromise the 4 percent rule’s probability. You probably don’t need any more reasons to doubt the credibility of the 4 percent rule, but nonetheless, there are several. Those reasons include:


If you are calculating your retirement expenses and you conclude that you can live on 4 percent of your assets every year, it is always a good idea to have this verified by a qualified financial advisor. Upon looking at your calculations, he may ask you, “Are you including your taxes?” For many retirees, the answer is “no.” It’s an easy mistake, but forgetting to take your taxes into account can significantly alter the viability of the 4 percent rule for your retirement plans.

When determining how much you can withdraw from your retirement account every year, you must include the taxes on the withdrawals you will make, in addition to the taxes you will pay on your dividends, bond interest and capital gains. Once you do that, you may find that 4 percent is just too much to withdraw.

Investment Expenses

Some retirees enjoy making high-cost investments – mostly because they enjoy receiving high-value returns. That’s understandable, but it’s important to remember that high-cost investments come with higher fees that can actually eat away at your returns, which defeats the purpose of making the investments in the first place.

If you are paying high investment fees, the 4 percent rule may not apply to you anymore because your assets are no longer as liquid as they used to be. Tying up your money in too many investments gives you less money to spend, and reduces the amount you can withdraw from your retirement account every year. For high-cost investors, living on 4 percent is no longer a good idea.

Big-Ticket Purchases

If you are living by the 4 percent rule, you must limit the large purchases you make – period. Even a one-time big ticket purchase, such as a vacation, a new vehicle or a down payment on a new real estate property, can wreak havoc on your retirement account if you exceed your annual 4 percent withdrawal limit.

Remember, the 4 percent rule dictates that you set the initial withdrawal amount at 4 percent and increase it with inflation every year. Because of that, making a large purchase that requires you to withdraw more than 4 percent of your account is “cheating.” This is even the case in years when your investments perform well. If you want to live by the 4 percent rule, the big purchases you dreamed of during retirement may not be possible.

Alternatives to the 4 Percent Rule

It’s an unfortunate reality: For many retirees, the 4 percent rule has dwindled down to 3 percent or lower. That means major lifestyle limitations that lower one’s quality of life – something that no one wants to experience in their retirement years. As the 4 percent rule continues to die off, retirees need to explore alternative solutions so that they can live out their retirement goals more fully. Those solutions can be explained by a CERTIFIED FINANCIAL PLANNER™ professional; if you are interested, call (877) 297-5851 to speak with a retirement income professional today.