What Is The 4% Rule For Retirement Savings?

If you're thinking about retirement, you're not alone. According to a 2024 AARP survey, 20% of Americans 50 years of age and over have no retirement savings, with 61% lacking the confidence they'll have enough money to last them through retirement. What this should tell you is the perfect age you should start thinking about retirement may be right now. The survey goes on to point out the impact of employer-based retirement plans on savings, as well as the fact 57 million Americans don't have access to one. If you're wondering why pensions are rare in the United States, that's probably you and everyone else.

In 1994, financial adviser Bill Bengen came up with a strategy, the 4% rule, that would supposedly cover your retirement and make you money while you were at it. Bengen based the rule on average returns and unforeseen events like stock market crashes. This plan determined that so long as your investment portfolio held 40% fixed-income assets and 60% equities, then you should have enough to cover your retirement for 30 years or more. The only caveat was you couldn't draw out more than 4% of your savings per year. Taking inflation into consideration, he would later tweak that number to 4.5% in the first year. If you're thinking about calling up your financial adviser to suggest this 4% rule, you might want to hold off until you read the rest of this article.

Is the 4% rule enough for everyone?

The problem with assuming a single financial rule will work for everyone is that everyone's financial situation is different. The execution of this rule, for example, assumes that someone with $500,000 in retirement savings would withdraw 4%, or $20,000, per year and adjust upward each year to account for inflation. In other words, if the inflation rate notched up 2% next year, you'd be attempting to live on $20,400 a year. However, since the 4% rule doesn't factor in everyone's ability to save, it can't be a reliable way to save for retirement for everyone.

It also doesn't take into account that the projected amount of savings to retire comfortably can vary from state to state, anywhere from $200,000 to over $1 million. It's a good idea to ask yourself where are the cheapest states to retire and speak to a financial adviser about a strategy to get you there. We have some tips on how to find a decent financial adviser. The 4% rule also assumes you get all your Social Security benefits, which are likely to decrease to 77% by 2034; the rule also doesn't take into account taxes on your withdrawals.

The rule doesn't adjust for life changes

According to research by insurance provider Genworth Financial, the average cost of in-home elder care in 2023 was $5,720 for homemaker services to $6,292 for home health aide services, community living costs ranged from $2,058 to $5,350, and residing at a nursing home cost on average $8,669 for a semi-private room and $9,733 for a private room. The 4% rule doesn't adjust for that.

The Centers for Disease Control and Prevention, meanwhile, reports life expectancy in the U.S. is now 76.4 years, a drop from the previous 77 years. Factors like heart disease, chronic liver disease and cirrhosis, unintentional injuries, and stroke all contributed to this statistic. It's impossible for the 4% rule to consider any of that in a calculation that's supposed to secure you financially for 25 to 30 years. With an average of $300,000 in medical bills for a retired couple, that's something that could take a major bite out of your retirement.

Of course, the other side of that coin is you could live beyond 30 years and outlive your retirement savings. A Gallup poll found one in three adults over 50 sideline basics like groceries to pay for their health care, while 37% of seniors aren't sure they'll be able to pay their health care costs next year. Even climate change can impact your retirement since natural disasters can have a huge effect on the stock market. This all said, better than relying on a potentially outdated investment strategy like the 4% rule, consider working with a trusted and valued financial adviser instead.