Longevity
Announcing Our Series on Longevity
The average human lifespan is increasing, and with that retirement is too. It’s important to consider these three questions so you don’t outlive your savings during retirement.
The 4% Rule
Published July 9, 2017
The 4% rule is a general rule of thumb to guide how much you can withdraw from your investments. Here’s how it works.
Perhaps you want to live off your own investments — many people have and continue to do so. You should consider the classic 4% rule, which has been the standard investment advice for over 20 years.
The 4% rule comes from the 1994 research findings of financial Planner William P. Bengen. He modeled a $1 million portfolio that was invested 50/50 between stocks and bonds. Mr. Bengen concluded that someone who started withdrawals between 1926 and 1976 could make the portfolio last for at least 30 years by starting with 4% withdrawals, and adjusting for inflation every year.
In 2004, he updated his research and added small-cap stocks to his analysis and raised the withdrawal rate for 4.5%. However, after 2008 and historically low interest rates, other researchers have suggested that a dynamic withdrawal strategy makes more sense.
In fact, a New York Times article from 2013 suggested that 4% may even be too generous of a withdrawal rate. This means that even if you can accumulate $1 million, you could be at risk of outliving your savings. There are other retirement drawdown strategies (meaning how you spend your savings in retirement) available, but all pose the same risk in the end of leaving money in the market and outliving your savings.
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