You may have heard of the “4% rule” when it comes to retirement. The idea is simple: After you retire, you withdraw 4% of your investment portfolio each year. In theory, this helps ensure your savings last for your lifetime. While this rule can be a helpful starting point, it’s not a one-size-fits-all — and it’s definitely not a substitute for a plan tailored to your specific needs, wants and wishes.

The truth is, how much to withdraw in retirement depends on factors like when you retire, if you’ll work part-time, how long you expect retirement to last, your lifestyle goals, inflation and whether you want to leave a financial legacy to heirs. So, the 4% rule should be viewed as more of a guide than a strict rule.
Let’s start with age. The 4% rule is often based on someone retiring at 65 and expecting to live until about 92. But if you retire earlier, you may want your portfolio to stretch further. In that case, you might need to start with a lower withdrawal rate, maybe closer to 3%. And if you retire later, you might safely withdraw a little more — perhaps 4.5% to 5% — depending on your financial situation.
Your retirement lifestyle also plays a big role. Are you planning to travel the world or spend more time at home? If you expect higher spending in the early years of retirement, you may need to adjust your withdrawal rate or plan to reduce spending later to balance things out.

Your financial flexibility matters too. If you have less wiggle room with your expenses, rely heavily on your portfolio for income or want to preserve wealth for your heirs, a more conservative approach might be wise. In this conservative scenario, your portfolio withdrawals may be met from interest and dividends. Think of your withdrawal rate as existing on a spectrum from more conservative to less conservative, with your personal situation determining where you land.

Then there’s inflation. A well-built strategy usually includes small annual increases in withdrawals to keep up with rising costs — about 2.75% per year. But you don’t need to take a raise just because the calendar says so. If the markets have had a tough year or you don’t need the extra income, it might be smart to skip an increase. Being flexible can improve the chances your money will last.

It’s also important to understand what’s known as your “portfolio reliance rate” — how much of your retirement income comes from your investments versus other sources like Social Security or pensions. The higher this percentage, the more conservative you may want to be with withdrawals.

And don’t forget the IRS. If you’re drawing from a traditional IRA or 401(k), you’ll need to take required minimum distributions (RMDs) once you reach age 73. Your RMD for any year is the account balance as of the end of the prior calendar year divided by a life expectancy factor according to the IRS. These RMDs need to be accounted for in your strategy.

The bottom line? The 4% rule is a useful starting point, but it’s just that — a starting point. A good financial advisor can help you build a strategy that reflects your age, your goals and your full financial picture. By revisiting your plan regularly and staying flexible, you’ll give yourself the best shot at turning your savings into a secure, fulfilling retirement.

This article was written by Edward Jones for use by your local Edward Jones financial advisor.

Mark Freeman
Edward Jones Financial Advisor
77 West Main Street, Hopkinton, MA
508-293-4017
Mark.Freeman@edwardjones.com

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