Four Percent Rule
Candlefocus EditorThis rule of thumb for retirement withdrawal was established based on historical data from 1926 to 1976. With stock and bond returns during this period, historical research suggested that a retirement portfolio could sustain a 4% withdrawal rate each year for 30 years without depleting the funds. The 4% withdrawal rate allows retirees to maintain their living standards during retirement and, if invested correctly, keep their money growing.
Under the 4% Rule, a retiree would withdraw 4% of their total investments in the first year of retirement. The withdrawal rate is adjusted annually to take into account changes in the inflation rate, so that the original purchasing power is preserved over time.
The 4% Rule is only one way of determining retirement withdrawals. Many advisors now recommend a withdrawal rate that is as low as 3%, especially when retirement investments are concentrated heavily in bonds or in treasury notes since they offer lower returns than stocks. It is also common to start with a higher withdrawal rate, such as 5%, and then adjust over time.
The 4% Rule is a good starting point for setting up a retirement withdrawal plan. But it is important for investors to understand that everyone’s financial needs are different. Determining a safe, steady withdrawal rate depends on factors such as your investment portfolio, inflation rates, life expectancy, and desired lifestyle. It is important to get professional guidance to make sure your retirement distribution plan works for you and your family.