The 4% Rule offers a simple plan for long-term retirement income. But is it still reliable today? Learn how it works and see if it fits your strategy. Curious? Check below to dive in.
1️⃣ What Is the 4% Rule?
The 4% Rule was introduced by financial advisor William Bengen in 1994. It suggests that retirees can withdraw 4% of their portfolio in the first year of retirement, then adjust that amount for inflation annually. This strategy was historically proven to last through even the worst economic downturns.
2️⃣ A Real-World Example: $1.25M Portfolio
If you retire with $1,250,000 at age 62:
- Year 1: $50,000 withdrawal (4%)
- Year 2: $51,500 withdrawal (if inflation = 3%)
- Year 3 and beyond: Continue inflation adjustments
It creates a stable and predictable income stream — simple and effective.
3️⃣ What Are the Assumptions?
- 50% stock (e.g., S&P 500 index)
- 50% intermediate government bonds
- Annual rebalancing
- Buy and hold — no market timing
This setup performed well historically — even during market crashes.
4️⃣ Should You Stick with 4%?
Some retirees find 4% too conservative. Others worry it’s too aggressive in today's market. Here’s what recent research suggests:
- Ultra-conservative: 3.5–3.8%
- Balanced: 4.0–4.2%
- Growth-focused: 4.5%+
5️⃣ Market-Based Adjustments
| Market Condition | Recommended Withdrawal Rate |
|---|---|
| Overvalued (Shiller P/E > 25) | 3.5–3.8% |
| Fair Value (P/E 15–25) | 4.0–4.2% |
| Undervalued (P/E < 15) | 4.5–5.0% |
6️⃣ Real-Life Scenario: Meet James and Karen
James and Karen retire with $1.25M. In Year 1, they withdraw $50,000. When markets dip in Year 3, they reduce spending to $42,000. When markets recover, they increase to $52,000. Their flexibility helps preserve their portfolio without stress.
7️⃣ Final Thoughts
The 4% Rule is a guide — not a guarantee. It's an excellent starting point for financial planning, offering clarity and confidence.
- ✔️ Adjust for inflation
- ✔️ Watch market trends
- ✔️ Be ready to adapt
Start with 4%, then make it your own.
