Stop Using The 4 Percent Rule
And what to use instead
The 4 percent rule has been regarded as the GOAT ( greatest of all time - for those who aren’t hip with the lingo ) in terms of retirement planning.
But all good things must come to an end.
In case you’ve been living under a rock, the 4 percent rule is a retirement strategy that involves only withdrawing 4% of your retirement funds each year.
The idea is that if you do this, you can withdraw funds during your retirement without ever having to worry about running out.
Now, I know what you’re thinking...
“Okay cool, so how much do I need to save to take out X amount of money each year?”
$40,000/year = $1,000,000
$70,000/year = $1,750,000
$100,000/year = $2,500,000
You can easily figure this out by taking the amount that you want to take out each year divided by 4%. So, if you want to take out $90,000 per year, that’d be 90,000 / .04 = $2,250,000
It’s important to note that the 4% rule only applies to the first year you withdraw. Each year, you’ll want to adjust the amount by the inflation rate.
So, let’s say year 1 inflation was 4%. In year 2, you would want to increase your withdrawal amount by 4%.
For example, if you want to withdraw $70,000 in year 1. You would withdraw $72,800 ( 70,000 x 1.04 ).
But here’s where the 4% rule is lacking
It assumes that you’d be taking money out during the worst economic scenario.
Like, honestly, how likely is it that there would be a crazy global war or pandemic around the time that you retire? Oh wait.. awkward
All joking aside, the rule is incredibly inflexible and assumes that you can’t change how much you’re withdrawing.
In reality, during poor economies, you could always decrease to 3%, and during great economies, increase to 5% or 6%.
Introducing the 3 to 6 percent rule.
The nice thing about adding flexibility to the rule is that it can also change the amount that you would need to save.
What if you want to withdraw 5% each year instead of 4%? Here are the same scenarios as above, except this time we’ll use the 5% rule.
$40,000/year = $800,000
$70,000/year = $1,400,000
$100,000/year = $2,000,000
In each of these scenarios, you’d have to save several hundred thousand dollars less than if you were using the 4%.
Just keep in mind that this is assuming that you’d be okay with reducing the amount you’re withdrawing during poor economies.
As long as you increase or decrease your withdrawal rate based on the economy, you can still safely withdraw without depleting your entire portfolio.
