4% Rule Retirement Calculator
Calculate how long your retirement savings will last using the 4% rule.
Understanding the 4% Rule
The 4% rule is a retirement planning guideline that suggests you can withdraw 4% of your initial retirement portfolio each year, adjusted for inflation, with a high probability of not outliving your savings over a 30-year retirement period.
Origins of the 4% Rule
The 4% rule was developed by financial planner William Bengen in 1994 and later popularized by the Trinity Study in 1998. It was based on historical market data and aimed to provide a safe withdrawal rate for retirees.
How the 4% Rule Works
- Initial Withdrawal: Withdraw 4% of your portfolio in the first year of retirement.
- Inflation Adjustment: Increase the withdrawal amount each year by the rate of inflation.
- Portfolio Allocation: Typically assumes a balanced portfolio of stocks and bonds.
- Time Horizon: Designed for a 30-year retirement period.
Limitations of the 4% Rule
- Market Conditions: Past performance doesn't guarantee future results.
- Individual Circumstances: Doesn't account for personal factors like health, lifestyle, or unexpected expenses.
- Tax Considerations: Doesn't factor in tax implications of withdrawals.
- Sequence of Returns: The order of investment returns can significantly impact portfolio longevity.
- Changing Withdrawal Needs: Doesn't accommodate varying withdrawal needs throughout retirement.
Modern Adaptations
- Dynamic Withdrawal Strategies: Adjusting withdrawals based on market performance.
- Guardrail Approaches: Setting upper and lower bounds for withdrawals.
- Time-Based Adjustments: Reducing withdrawal rates as retirement progresses.
- Bucket Strategies: Dividing assets into different time horizons.
- Variable Percentage Withdrawal: Calculating withdrawals as a percentage of the current portfolio value.