The “4% retirement rule” is a common guideline suggesting that retirees can safely withdraw 4% of their total retirement savings in their first year of retirement, then adjust that amount annually for inflation to maintain a sustainable income throughout their retirement, typically aiming for a 30-year timeframe; essentially, it’s a rule of thumb to help estimate how much you can spend from your retirement savings without running out of money.
Key points about the 4% rule:
  • Withdrawal amount: In the first year of retirement, you withdraw 4% of your total retirement savings.
  • Inflation adjustment: Each subsequent year, you adjust the withdrawal amount based on the inflation rate to maintain purchasing power.
  • Time horizon: The rule is generally based on the assumption that your retirement will last 30 years.
Important considerations:
  • Not a guarantee: The 4% rule is just a guideline and may not be suitable for everyone depending on their individual circumstances, investment portfolio, and risk tolerance.
  • Market volatility: Market fluctuations can impact the sustainability of this withdrawal strategy.
  • Other income sources: The rule should be considered alongside other retirement income like Social Security benefits.
Example:
  • If you have $1 million in retirement savings, you would withdraw $40,000 in the first year.
  • If inflation is 2%, the following year you would withdraw $40,800.