In this podcast I will answer the question: What are the benefits and limitations to the 4% withdrawal rule for retirement planning?

The rule of guideline came out in the 1990s. It states that if a retiree withdrew 4% of their initial retirement savings per year, their savings would last them for 30 years. The withdrawals would increase over time to adjust for inflation.

This was based on a very aggressive 70% stock portfolio at a time of fairly high stock returns. Most retirees I know would not have held this aggressive of a portfolio during the last 10 years

This 4% rule has been used as a rule of thumb for many people to estimate how much savings they need at retirement given their current spending. However, it is just that, a rule of thumb, a rough guide to achieve a target amount.

I like this guideline for a quick estimate – for a very rough estimate. If someone would like to have about $80k/yr from their investments, they would need to have about $2M saved up. At 3% $2M will provide $60k/yr. This is useful to know, it is a good starting point and a good double check to other retirement projections.

Of course, there are many limitations to this simple estimation, including the following.

  • One of the primary limitations is that a flat withdrawal rate does not take into account any changes in cash flow needs for health, travel, vehicles, inheritance, pension, social security or other future cash flows. Some of these needs are unforseen but many are not. There are many people who need more of their savings upfront and less as other cash sources begin. Some would like to travel or spend more in the begining of retirement and reduce spending with time.
  • The tax results of your withdrawals could impact the effective return. If your investments are primarily in IRAs or accounts where you will need to pay income taxes on the amount you withdrawal, that will reduce the amount you have to spend. If there are large capital gains to pay that will also impact the net amount (alter taxes) that you have to use.
  • How conserviative (or agressive) is your portfolio is another factor and how accepting you are if the market goes down significantly. People can underperform the market significantly by selling when things to not look good and the market goes down and buying when everything is positive and the market is up.

The rule does not provide flexibility to change withdrawals and projects based on actual investment performance.

In conclution, the 4% rule provides a nice easy estimate but a more detailed plan should be used and updated regularly to project how your long term spending and retirement will work out.

I plan to offer the speadsheet that I use with clients free; however, I need some time to get it ready for general use.

I appreciate your feedback, comments and questions.  You can contact me on facebook, email me (, or call 520-325-0769

Bill Holliday is a Certified Financial Planner with AIO Financial.  Please contact us at (520) 325-0769