Authored by Peter Daisyme via Due,
The 4 percent rule has guided retirement planning for three decades. The idea is simple: withdraw 4 percent of your savings in year one, adjust that dollar amount for inflation each year after, and your money should last about 30 years. It is a useful starting point and a great mental shortcut. But the person who created it has spent recent years telling people it is far more flexible - and often more generous - than the rigid version most savers cling to.
Experts say the best retirement withdrawal strategy adjusts to changing conditions. oneinchpunch/shutterstockWhere The 4 Percent Rule Came From
Financial planner William Bengen introduced the rule in 1994 after crunching decades of historical market data. He wanted to find the highest withdrawal rate that would have survived even the worst market conditions of the 20th century, including the Great Depression and the brutal 1970s. The answer he landed on was about 4 percent, and the figure stuck so firmly that it became gospel.
The crucial detail that gets lost is what "survived the worst case" actually means. Bengen was not describing the typical retirement - he was describing the single most unfortunate starting year in history. For the vast majority of retirees, a portfolio drawn down at 4 percent not only lasted; it grew substantially.
What The 4 Percent Rule Gets Right - And Wrong
The rule's strength lies in its simplicity and conservatism. It forces you to think in terms of a sustainable withdrawal rate rather than
