See if you're ready to retire with the 4% rule

Whether you're going to retire in five years or 25, you need to put the 4% rule to work.

It's one of the best ways to tell how much monthly income you can generate from a $50,000, $500,000 or $1 million nest egg without having to worry about outliving your money.

Though a bit misleading, the "4% drawdown rule," as it is known, says you should take out 4% — it was later revised to 4.5% — of your savings the year after you stop working. You then withdraw the same amount, adjusted for inflation, each year after that.

If you do this, the rule says your savings should last through at least 30 years of retirement.

Bill Bengen, a certified financial planner and author in Chula Vista, California, created the rule after studying how retirees from 1926 through the 1980s would have fared had they invested in a balanced portfolio of stocks, bonds and cash.

"I tried to find the worst-case scenario where retirees ran out of money (in less than 30 years), and the rate was about 4.5%," Bengen says.

The rule stuck, but recently there's been some debate about whether this savings principle remains valid in an era of volatile stock markets and record-low interest rates that have made it more difficult to earn a respectable return.

retirement savingsPerhaps we should plan to withdraw no more than 4% plus inflation? Or even 3.5% or 3%, some financial pros suggest.

But after a lot of calculating and soul-searching, most advisers seem to be sticking with the original rule as a good starting point for planning and discussions.

Peter D'Arruda, president and founding principal of Capital Financial Advisory Group in Cary, North Carolina, says the rule can help people understand how they'll live off their nest eggs in retirement.

"Some people think they're going to retire with $100,000. Or they're surprised to learn they can only have $40,000 per year off a million dollars," D'Arruda says. "The rule is a great place to start the conversation about what they can expect."

The rule's big appeal is its simplicity.

Let's say your goal is to have $500,000 in stocks, bonds and CDs when you stop working.

That establishes a base for your withdrawals of $22,500 for your first year as a retiree to cover your living expenses.

If inflation ran in line with the historical average of 3% for each of the next two years, you'd withdraw $23,175 in the second year and $23,870 in the third year.

Your balance will slowly fall, but retirees who have followed the 4% rule have typically seen their savings last about 30 years.

However, the future may not play out like the past.

Runaway inflation, another global recession or a banking crisis could diminish returns and cause retirement funds to drain away more quickly.

While there are many possibilities, Bengen still believes the rule is a good starting point.

"I haven't seen evidence yet that the 4% rule will be violated," Bengen says. "But no one knows for sure. No one knows what inflation will be in the future and if we're entering a period of (lower) returns."

If you want to be a little bit safer in your planning, use a lower withdrawal rate.

Most financial advisers say you need to be able to replace 70% of your pre-retirement income after you stop working.

So let's assume you and your spouse earn $90,000 per year, or $7,500 a month. To generate 70% of your current income after you retire, you'll need to come up with about $5,250 per month.

Social Security should help you reach your goal.

Social Security cardsWhen should you start collecting Social Security?

Deciding when to start Social Security is one of the most important retirement decisions you'll make. Is it smart to sign up for a check as soon as you turn 62, the youngest possible age? Or should you wait a few years, when you'll qualify for a bigger monthly payment? Let our 6-step guide help you make the right call for your financial situation.

The Social Security Administration can provide an online estimate of what your monthly benefits will be based on current law.

Let's assume you and your spouse will each receive the average monthly Social Security retirement benefit of $1,294 (as of May 2014).

That $2,588 per month puts you about halfway to your goal.

If you don't have any other sources of income to depend on, you'd need to generate the remaining $2,662 per month from your savings.

Using the 4% rule, you'll need about $709,866 to safely withdraw that much each month.

(Here's how to do the math: Multiply the monthly income you need from your savings by 12 and divide the product by 0.045. So $2,662 a month times 12 is $31,944; divided by 0.045, it's $709,866.)

Now if you're feeling uncertain about the future, use 3.5% or 3%.

At 3.5%, you'd need $912,685 to maintain that standard of living.

And if you're feeling better about the future, maybe you can withdraw 5%, in which case you'd need $638,880.

Now use our Savings Goal Calculator or 401k Calculator to figure out what you must do to save that much.

Don't be discouraged if those calculators say you'd need to set aside more from your paycheck than you can possibly afford.

Save what you can. It isn't an all-or-nothing proposition.

Even a nest egg of $300,000 — half of your goal — is still enough to generate about $1,000 per month.

In the end, while you might use the rule for planning, it's only a starting point.

Christopher Currin, president of Pegasus Financial Advisors in Dallas, says many people will have to draw well more than 4% because they haven't saved enough money.

A recent survey from the Employee Benefit Research Institute and Greenwald Associates found that 60% of workers reported having assets worth less than $25,000. That doesn't factor in home equity or pensions.

The reality is that the majority of workers could use any number and will never have enough money to retire if they strictly stick to a drawdown rule.

"The problem with the 4% rule is that it can keep people working indefinitely," Currin says.

The key to surviving retirement with enough money, he says, is to be flexible and maintain a low-cost lifestyle. He recommends taking a commonsense approach and adjusting withdrawal rates as needed.

That means creating a plan that works for you for when it's acceptable to splurge and when you have to cut back to ensure your savings don't run out.

"If we can get people to admit that their money won't last forever unless they manage it properly, that's already half the battle," D'Arruda says.

  • Marc Jones

    I am 48 recently bought a house in 55 plus community which will be paid off in 5 years with the rental and extra payments I make. I will be debt free not a big travel fan or keeping up with the Jones'. Do you think I will be good with 500-600k retiring at 62 or should I work to 65? Thanks in advance.

    • Bill Cenne

      If you have a mortgage, pay it off before retiring. Everything costs double when you're retired. You'll probably only get $1300 social security, so plan on living very frugally and only touch the $500 grand if you absolutely have to. It will go faster than you think.

      • Marc Jones

        Would the 4% rule apply to the 500k? I still plan on working until 62 and took a part time to double triple my mortgage payments. I hope to have it paid in 3 years and rent it until i retire. But yes im pretty frugal as it is. Thanks for your reply.

  • Alexander Fox

    There are a ton of places cheaper to live than Orange County. I would never consider living there.

    • why bother

      I am originally from the farm area of central California. It is cheap and located for day trips to the uncrowned beach areas and Sierras. But the smog is not good. I have excellent medical facilities in Orange County and great bicycling. My housing cost is one tenth my salary and compensation. I am at around $2 million now but I anticipate at 67 I will be at $3,000,000.

  • Bill Cenne

    Great idea and something to look forward to. But if you die tomorrow, you won't see one penny of that social security money. Always retire at 62 and go back to work part time if you like your job. Of course, if you do heavy manual labor, scratch that idea.

    • NJ_3929

      But if you live to 100, you'll be glad you didn't take it 62.

      • Bill Cenne

        Are you nuts? You'll get far more money if you collect it for 38 years than if you wait. Do the math before you post.

        • NJ_3929

          You misunderstand me. I wasn't suggesting you wait until 100 to take SS. That is ridiculous.

          What I am saying is that "if you live to 100" you'd be better off waiting until 70, after which there are no more deferral increases, than if you'd taken SS at 62.

          Do the math.

          • Bill Cenne

            nope, you're still wrong. everyone knows you get more money if you draw right away. even the social security administration admits it. look it up, i did.

          • NJ_3929

            Apparently, you need to keep looking.
            Typical break-even points (the point at which the deferral starts paying off) are in the early 80s, after which you will be getting more from SS by waiting till 70.
            If you have health conditions and/or family history you may very well want to take SS earlier, but if you might live past 80, and many will, you might want to consider waiting.

          • Bill Cenne

            Sorry, NJ, even the Social Security Administration has to admit you're wrong. You're living in a fantasy world with funny math.

          • NJ_3929

            What are you talking about?

            Let’s say your full retirement age is 66 and your
            monthly benefit starting at that age is $1,000. If
            you choose to start getting benefits at age 62, we’ll
            reduce your monthly benefit 25 percent to $750 to
            account for the longer period of time you receive
            benefits. This decrease is usually permanent.
            If you choose to delay getting benefits until age
            70, you would increase your monthly benefit to
            $1,320. This increase is from delayed retirement
            credits you earn for your decision to postpone
            receiving benefits past your full retirement
            age. The benefit at age 70 in this example is 32
            percent more than you would receive each month
            if you had chosen to start getting benefits at full
            retirement age.


            $750 * 12 mos * 20 years (82 - 62) = $180,000
            $1,320 * 12 mos * 12 years (82 - 70) = $190,080

            That's the math.

          • Bill Cenne

            Wrong again. Common sense and simple math tells you that you get more money if you start collecting at 62. Everybody knows that and the Social Security Administration agrees. Stupidest thing you can do is to pay for Social Security your whole life and risk not getting one penny back from it by putting off collecting until age 70. Now quit bugging me and sell your products elsewhere.

          • NJ_3929

            The simple math is right above your post. $180K vs $190K.

            I'm not selling anything, but you would, I think, benefit from a little education in personal finance.

            Good luck.

          • Bill Cenne

            Sorry, your math is wrong and you lack any modicum of common sense. Always take Social Security at age 62, you'll be money ahead.

          • NY

            This was hilarious. Bill says check the math, because I'm right. Math shows he is wrong, so he says, math lies. Then he explains, I'm right, because I'm right. Not because I have any real reason, but because I'm right.

            Bill trying to make himself feel better by justifying his own personal choices.

            There are a lot of good reasons to retire early. But don't lie to people and tell them it will "always" give them more money.

          • Bill Cenne

            didn't understand one word of that, but at least you got it off your chest. regardless, follow my advice and you'll be better off and i know i'm right.

          • NY

            Good job bill. We all know you believe you are right. LOL

          • Bill Cenne

            i've never made a mistake. i thought i did once, but i was wrong. but i think "you" should experiment with your way and see if i wasn't right when you tip over.

          • Paul York

            Bill, there is such an onslaught of financial articles advising all retirees to wait till 66 or 70 that hardly anyone admits to taking it at 62 anymore. I agree that its better to enjoy the money before the crumbling 80 and 90 yrs. of age. What criteria do you use for choosing a good financial adviser for 60 and above retirement?

          • Bill Cenne

            The so called "experts" are all wrong. Figure it out, if you die at 66, you get ZERO, ZILCH, ZIP! And it's a no brainer choosing a financial adviser if you are lucky enough to put away a few hundred thousand of your hard earned dollars. DO NOT TAKE THE RISK OF LOSING 30% IN THE MARKET, AS HAS HAPPENED BEFORE! Just go to the bank and buy guaranteed and insured CD's and don't risk your life savings, you worked and sacrificed too hard to lose a bundle of it! ! !

          • Bill Cenne

            Bingo! There are no guarantees in life. Take SS at age 62, you'll get more money.

          • NJ_3929

            Only if you die young. And, if you live a long time you'll likely miss that extra money.

            Good luck.

          • Bill Cenne

            You're finally starting to come around. I'll end this little debate with some advice: If you put off collecting SS and die at age 63 you don't collect ONE RED CENT!
            Thank you and have a long and healthy life.

          • NJ_3929

            "starting to come around"

            Where have you been? I've never denied that the chance of a short life out weighs the benefit of delayed SS.
            What I have disproven successfully, is that if you do live a long time, say 85+, then you will be better off delaying SS. (not necessarily retirement, but SS)

            Also, if you die at 63 you're unlikely to *need* any retirement funds at all. You might as well retire at 50 and enjoy your last 13 years.

          • Bill Cenne

            Alright then, you finally agree with me, except the part about being better off, and the smart a$$ remark at the end. But you are a little obsessed with this subject, you need to find other interests, NJ3929.

          • NJ_3929

            lol, you are an expert, apparently, in seeing only what you want to see.

            I don't agree with you because the part about being better off is my main point. You on the other hand seem to think that it is always better to take SS as early as possible, which is patently incorrect.

            Oh, and it is hilarious that you are on here telling me that I'm spending too much time on here.

          • Bill Cenne

            It "IS" always better to take SS early, cuz you get more money. But NJ, you're losing it! You need to deal with your inequities and move on. You've lost this battle, take your lumps and move on, man! YOU'RE LOSING IT!

          • NJ_3929

            You are mistaken, as I have explicitly shown, if you live past your early 80s it is better, i.e. you will get more money, to delay taking SS until 70.
            In addition, if you delay less the break even point is earlier.

            I don't know what "battle" you were watching, but the numbers are against your position.

            Take your own advice.

          • Bill Cenne

            Nope, still wrong. Please take my advice when the time comes. You never want to die at 63 and not collect one single penny of Social Security that you have paid into for perhaps half a century. Now quit bugging me, I'm right and everybody but you
            agrees with me.

          • NJ_3929

            Who agrees with? quote someone, please.
            What is your plan? show some math.

            Substantiate your claim with valid evidence or admit that you don't know what you are talking about.

          • Bill Cenne

            Don't need no math, numbers lie. Everyone, and I mean "EVERYONE", agrees of you keep working at your stressful job, keep fighting traffic every day of the work week, and continue with the daily grind of work, you will collect less Social Security checks than if you retire at 62. Take the guaranteed route, collect SS at 62 and invest your savings in guaranteed and insured 5 year CD's at 2% and you'll have more money. Here's wishing you a happy life (especially if you take my advice).
            Goodbye, it was nice talking with you.

          • NJ_3929

            "Don't need no math, numbers lie. "

            Now I understand. Good luck.

          • Bill Cenne

            Thank you, and thank you for finally admitting I'm right. Follow my advice and you will have many, many happy days during your "Golden Years"!

          • NJ_3929

            lol, careful your delusions are kicking in again.

            I will be fine in my golden years, but only by not listening to your bad advice and investing wisely, some in stocks to capture the gains and some bonds to mitigate risk (less in bonds right now due to interest rate risk actually) and a little in cash/CDs/etc for short term use.

            Now, please, stop "bugging me".

          • Bill Cenne

            I don't know how old you are, and don't care. When you are close to retirement age and have accumulated a nest egg to be proud of, don't risk it, and like we BOTH agree, collect SS at 62. Until then, take advantage of all the cock-a-maimy schemes and high risk ventures you want to! Even a blind squirrel finds a nut once in a while.
            Now, GOODBYE!~

          • NJ_3929

            "... and like we BOTH agree, collect SS at 62."

            lol, now I understand why you think that "EVERYONE" agrees with you. Delusions must be fun.

            Good luck with that and stop "bugging me".

          • Bill Cenne

            I'm just glad to know that you are finally leaning towards taking my advice, which is taking the sure thing and don't let such important life situations be dictated by taking risks and chances. Trust me on this one, your life savings, when the time comes, is nothing to be left dangling for someone to swindle you with false hopes and promises and also having the Grim Reaper staring you in the face.
            And I am glad to be able to quit "bugging" you.
            Have a good life.

          • abraba

            Dead people don't care whether they collected against something they paid into. And if you die at 55, you won't collect anything either.

          • Bill Cenne

            nobody expects to die at 55, but everyday in the paper someone is tipping over at age 65. always start collecting social security as soon as you can, that's why you paid in!

          • abraba

            But you won't care because you will be dead. Why is it important to "get" more money? You want to have enough money to live on for the time that you are alive.

          • Bill Cenne

            number one priority is to NOT outlive your money though. always hold some back to pass on to your heirs. that's how you want to be remembered and that defines your legacy.

  • Bill Cenne

    Never put your whole retirement nest egg in the market, that's economic suicide. Just be safe and get 5 year CD's at 2%. Your savings grow by 10% every five years, and you can ladder them so they mature at different times. Don't be so dam greedy in your old age, you had 40 years to get rich in the stock market and it didn't happen, so forget about it and be safe, not sorry.

  • Bill Cenne

    A better idea is to take 2% out and buy 5 year CD's at 2% with the rest. Your money will never run out, and you can't lose hundreds and hundreds of thousands when the market drops 30% again. It's guaranteed AND insured, can't ask for anything better. Don't be so dam greedy. You will most likely have to dip into your million dollars, so you probably will have less than that in 30 years. Never plan on dying broke, that's a recipe for disaster.

    • NJ_3929

      Unfortunately, with taxes, fees, etc. 2% return likely won't keep up with inflation.

      • Bill Cenne

        Inflation is not a worry when you have $1 million dollars. You just have to face the facts of life. But if you only have $10,000, you have a long, rocky road ahead of you.

        • NJ_3929

          Inflation is always a worry.
          With your 2% CD plan $1 million will only provide $20,000 / yr. That's barely above poverty for a couple ($16,000).

          Add in an easy 2% inflation for 30 years and you'll only be getting around $11,000 per year. A more average 3% rate, leaves you with only $8,000 / yr.

          Perhaps you don't plan on living to 92, and with only $8,000 per year to do it, it's no wonder.

          • Bill Cenne

            Inflation can be misleading. You don't buy a new house, a new car, and completely re-place everything you own every single year. You can live on a $1300 Social Security check if you have to, many, many people do. If you have a $1 million dollar nest egg, just spend the interest and keep the principle for emergencies, it goes faster than you think it will.

          • NJ_3929

            I'm confused by your statements. If "it goes faster than you think it will" then I would think that inflation is something to pay attention to. Even with a $1 million.

            The point is that even if you can live on x dollars now, in 30 years will you be able to live on that same x dollars.
            If you can live on SS checks, then you can do what you like with the rest, but if you need to drawdown on your savings then your best chance of not running out of money is some investment and use something like the 4% rule to withdraw from it.

          • Bill Cenne

            When I say it goes faster than you think, I am talking about emergencies, repairs, car and house problems, family misfortunes, health related issues, on and on and on.....................

          • NJ_3929

            Actually, you need better than 4% to account for inflation. And yes, the market drops, but it also recovers. The whole point of the 4% withdrawal rate is that it will almost certainly survive the downturns.

          • Bill Cenne

            That takes over twenty years. Most retirees don't have the luxury of taking that big of a risk. That's the "real" world.

          • Joseph Banken

            This is entertaining. I admit that I have learned a great deal from both of you here. Thanks to you both for this spirited discussion. I have been asking myself many of these same questions.

          • Popeye Bluto

            Thank you! Please don't make the same mistakes I made. I just received an offer for a 5 year bank CD at 2.53%. A calculator shows that $530,000 gives you six hundred grand! That's better than anything I've found in the last 15 years! Too bad I don't have the five thirty, but still.............

          • jbnkn

            I hear you on that one. Having 530K would be nice. I don't know anyone who has this much dough lounging around either!

          • Bill Cenne

            Only a small percentage of Americans live into their nineties, be realistic. And you CAN live on $16,000, millions of people do it. You'll have social security, so it should be a little easier.

          • NJ_3929

            From the SSA site:

            According to data compiled by the Social Security Administration:

            A man reaching age 65 today can expect to live, on average, until age 84.3.
            A woman turning age 65 today can expect to live, on average, until age 86.6.
            And those are just averages. About one out of every four 65-year-olds today will live past age 90, and one out of 10 will live past age 95.

  • Bill Cenne

    After you're in your fifties, the market is nothing to be in. You can lose hundreds of thousands of dollars of your nest egg when it drops 30% again. Just buy 5 year CD's at 2% and don't be so dam greedy.

    • jonathan

      That sounds like a quitter's mentality to me. When has the market dropped 30% and it didn't get it right back over the next couple of years? Staying in the market is a gamble but it's a gamble that you could probably fix by working 2 more years if things don't go well.

      • Bill Cenne

        jit's happened three times in my working career, dumazz. the experts say it takes 16 years to recoup your losses. if you are retired and it drops 30%, what are you supposed to do, go without groceries for a few years? think before you post, einstein.

        • jonathan

          I'd love for your old ass to talk to me like that face to face. If you were dumb enough not to have any advisors and you actually took a 30% hit, that's on you.

          • Bill Cenne

            i don't think so. i've been running a karate academy the last twenty five years.
            and "advisors" WERE in control.

    • NJ_3929

      The market can and will drop significantly, but over the long term it will likely outpace almost any other investment.
      That is why the 4% rules specifies 4% to start and then adjust the amount for inflation. The study, I think, went back to 1929 and for any given 30 year period there were no failures, i.e. it didn't run out of money.

      If you can live on 2% of your portfolio and can deal with the declining purchasing power of that 2% and want to leave all the principal to your heirs then what you suggest is a very safe way to do that.
      If however you need 3% and the adjustments for inflation, then the 4% rule is pretty darn safe too and you'll have a fair chance of leaving a much larger inheritance, if that is what you want.

      • Bill Cenne

        When you are retired, there is no "long term". Figure on 15 more good years, and after that, big medical bills start adding up, then you tip over anyway. Just buy CD's and spend the interest and keep the principle.

        • NJ_3929

          That depends on when you retire and how long you live. And 15 years isn't exactly short term.
          "Just buy CDs" is only sightly better than putting it in your mattress these days.
          The best chance people have of not outliving their money is conservative investment and something like the 4% rule. It allows you to use some of your nest egg while not running much risk of it running out and giving you a good chance of keeping up with inflation.

          • Bill Cenne

            5 year CD's at 2% makes your money grow by ten percent every five years, guaranteed and insured. That beats the crap out risking it in the stock market.

          • NJ_3929

            And if inflation is 2.1% then you are losing money. Currently, it's 1%. But in fiive years it could by much greater, especially since the FED wants it above 2%.

            Since 1929 the market has returned around 6% annually after inflation.

          • Bill Cenne

            "The market" is Dow Jones. Nobody uses those stocks, if they're even available. But like I said, time isn't on your side when you're in your fifties and sixties. Time to get out of the market or you'll be sorry. I've proven this the last forty years. Now quit bugging me and go sell your products elsewhere.

          • NJ_3929

            "The market" is all stocks publicly available, but includes the Dow which is available if you had the slightest knowledge of the stock market.

            I think you would benefit from a little education if personal finance.

          • Bill Cenne

            What you need is a little education in facing when you are wrong and interpreting the term, "get lost". Now quit bugging me and go back to your Mom's basement.

  • Bill Cenne

    Collect SS "AND" teach if you want......part time! Lots of schools need part time teachers, and you'll be money ahead.

    • Last Word

      l think its important as we talk about retirement to remember that over the last 20 years, the average expected retirement period has risen from 14.8 years to 18.8 years for a 65 year old male, and from 18.5 years to 21.2 years for a 65 year old female. So for most folks expecting to live a long 30 year retirement is in for a rude awakening. Also, the number one thing retired folks wish they had done, was not stressed about retirement so much! By the time you're 75-80, if you're not dead its likely your partner will, which also provides additional money to live on.

  • Bill Cenne

    Stocks, whether they pay dividends or not, are subject to the roller coaster stock market. CD's are available for 2%, just ladder some 5 year ones and your money grows 10% every five years, guaranteed and insured!

  • Bill Cenne

    It's more important to cut costs and cut unnecessary spending. The first place I cut was cell phone, cable TV, and internet. Next is transportation and groceries, because I drive too much and eat too much. Lay the groundwork, and you can downsize your housing and eliminate your car altogether to live even more conservatively. And stay out of the casinos............oops, that slipped out.

  • John

    I get 100 percent of pay at 34 years of service with the government! I also bought Apple when it was 75 dollars so I think I am going to be OK. My house is not paid for and never will be after taking cash out for education and a lawsuit but bought in OC super low and OC real estate is better then gold. Looking to move somewhere and pay cash. Got back looking at AZ and the Prescott area but did not impress me. Going to look in OK. wife is a full Cherokee and we can get free meds back there otherwise my meds will be 1500-2000 a month!

  • ohiodale

    I plan to retire at the end of my 66th year no matter how much I have saved for retirement. I will take SS 2 months later and get my full benefit. I plan to use the 4.5% withdrawal rate and if the money lasts even 22 years I will be happy. Not many people live beyond 87 years old and if you do how much will you be spending when you are that old? I would never plan to make my money last 30 years because a couple percent of people live that long. I am going to spend and enjoy my final years because I earned it. People save and die with $100s of thousands that is later squandered.

  • Lawrence C

    I don't understand how if you plan on withdrawing more per year (5% in the example vs. 3.5%), why you would need less of a nest egg (638K vs 912k). I understand the number came from math, but wouldn't your savings need to be more to account for higher withdrawals every year?

    "At 3.5%, you'd need $912,685 to maintain that standard of living."

    "And if you're feeling better about the future, maybe you can withdraw 5%, in which case you'd need $638,880."