The 4 Percent Rule for Retirement

Will you have enough to retire? Are you saving enough? Here's a quick way to estimate if you're on track.

Rules of thumb are never perfect, but this helps you "take your temperature," especially if you have some time before retirement. The closer you get to your actual retirement day, the more important it is to run detailed numbers with a calculator or financial planner.

Here's how it works: The assumption (and it's an assumption — not a guarantee) is that you can withdraw 4% of your retirement savings each year for a typical 25-30 year retirement.

That number may sound low, and in some cases it is too low. But it was originally chosen to be a "safe" withdrawal rate that provides an increasing income (your income should rise each year with inflation). Again, the word safe doesn't mean it never fails.

Example: For every $100,000 you have saved at retirement, you can withdraw $4,000. If you have $1 million, that's $40,0000 per year, and the amount should increase each year.

Ultimately, detailed calculations should prove more helpful than a rule of thumb. In some cases, you could potentially take more, especially if you're willing to reduce your withdrawals when markets go down. In other cases, you should take less.

With relatively low interest rates, inflation concerns, and high stock valuations, it's critical to decide what's right for you. Some studies suggest that 3% or so is a more realistic number. However, broad-based rules of thumb won't do you any favors. This isn't exactly a "rule," it's the result of a study that later got popularized as a rule of thumb. And it assumes that you experience the worst-case-scenario in your life, which hopefully isn't in the cards.

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Justin Pritchard, CFP® is a fee-only fiduciary advisor who can work with clients in Colorado and most other states.

Chapters:
0:00 Intro: 2 Critical Pieces of Info
0:12 How Much You Need & How Much You Can Spend
0:36 How the 4% Rule Works (Example)
1:14 Inflation Adjusted Income
1:46 Only Counts Withdrawals (Not Social Security, etc)
1:59 Does it Work?
2:30 Success Factors and the 4% Rule
2:53 Other Withdrawal Rates and Allocations
3:36 Wrap Up

IMPORTANT:
It's impossible to cover every detail and topic in a video like this. The only thing that's certain is that you need more information than this. Always consult with a CPA before making decisions or filing a tax return. This is general information and entertainment, and is not created with any knowledge of your circumstances. As a result, you need to speak with your own tax, legal, and financial professional who is familiar with your details. Please verify with your plan administrator when employer plans are involved. This information may have errors or omissions, may be outdated, or may not be applicable to your situation. Investments are not bank guaranteed and may lose money. Opinions expressed are as of the date of the recording and are subject to change. The Comments section contains opinions that are not the opinions of Approach Financial, Inc., and you should view all comments with skepticism. Approach Financial, Inc. is registered as an investment adviser in the state of Colorado and is licensed to do business in any state where registered or otherwise exempt from registration.

[Wyldwulf]

I have never understood this formula as there seems to be one vital variable missing...years in retirement? Or is this supposed to work based on average market returns beating the 4%, as long as you can actually survive on the 4% of the invested nest egg at the initial time income stops, regardless what age and lifespan?