The 4% Rule for Retirement Just Got an Upgrade

As you get closer to retirement age, you’ll want a plan for how to spend your savings while ensuring you have enough money to last for the rest of your life. William Bengen, the creator of a popular rule for retirement spending known as the 4% rule, recently updated his guidelines. Here’s what he says about the number that will safely get you through your golden years. 

Keep in mind that retirement is different for everyone; the 4% rule is a general guideline and might not be right for you. To get personalized advice for your retirement finances, talk to Farm Bureau.

What Is the 4% Rule for Retirement?

The 4% rule is a guideline for withdrawing money from investment accounts like 401(k)s and IRAs that helps protect you from running out of money during your retirement. 

The idea is that if you withdraw 4% of your retirement savings per year, your money will last for 30 years. So, for example, if you have retirement investments of $1 million, under the 4% rule you could withdraw $40,000 each year. The 4% applies to your retirement portfolio, so you’d have your withdrawals plus Social Security and any other pensions or income to cover your expenses for the year. 

How Has the 4% Rule Changed?

In his new book, A Richer Retirement: Supercharging the 4% Rule to Spend More and Enjoy More, Bengen points out that the 4% rule is very conservative. He came up with it in the 1990s, when retirement timelines were growing from about 10 years to 20–30 years or more, and people worried about running out of money. 

Even though the rule has become quite popular, Bengen has said it’s not something he recommends to everyone because it’s so conservative. He found that many people can safely withdraw more than 4%. He took a more sophisticated look at his research, and now he thinks 5.25% to 5.5% is a good range for people who are retiring today. This allows people to spend more of their hard-earned money doing things they’d like to do, particularly early in retirement when they are physically able but perhaps more reluctant to spend due to uncertainty about their future needs. 

In the example of $1 million of retirement investments, that would give you a withdrawal amount of $52,500 to $55,000 in a year. Compared to withdrawing 4%, you would have another $12,000 to $15,000 to spend that year.

What Should You Keep in Mind When Calculating Retirement Withdrawals?

There are a few things you need to think about:

• Diversification is important. Bengen’s new withdrawal rate recommendation is based on a diversified portfolio.
• It’s a good idea to rebalance your portfolio once a year to make sure your investments are in line with your goals.
• If you have flexibility in your retirement timeline, try to avoid bear markets or periods of high inflation, since those are going to lower your withdrawal rates.

For Personalized Advice, Turn to a Professional

There’s no retirement investment withdrawal rate that’s perfect for everyone. The amount you may want to take out depends on your other income, goals, health, expenses and other factors. Find a Farm Bureau agent and talk through your financial situation and retirement goals to determine what’s right for you.