Retirement income strategies: Rethinking the 4% rule

As you approach retirement, you might be wondering about the best way to create a steady income stream. For years, financial experts have recommended the 4% rule. This rule suggests you can withdraw 4% of your retirement savings in the first year, then adjust that amount for inflation each year to make your savings last.

The 4% rule was designed to help retirees through tough economic times, like market downturns, by considering investment returns and inflation. However, it doesn’t account for other income sources or personal circumstances.¹

While this rule has been a cornerstone of retirement planning, it might not be the best fit for everyone. A personalized spending plan tailored to your unique situation could be more effective. After all, we all have different savings and spending needs. So, is it time to rethink the 4% rule for your retirement? ² Let’s explore how it works and see what’s best for you.

How the 4% rule works

During your first year of retirement, you would take 4% of your money out of your investment portfolio to spend. Then, in the second year you’d take the same 4% plus the inflation rate.

• Assuming you have a $1.25 million portfolio, you’d take out $50,000 in the first year.
• In the second year, inflation climbs by 2%. You would take out $51,000. 
• In year three, you would take $51,000 plus inflation for that year and so on.

This formula is designed to keep your purchasing power year over year. According to the rule, your portfolio would last for 30 years using this method. So, if you retire at age 65, you’d have enough money until age 95. This rule also assumes that you distribute 50% of your entire portfolio to stocks and the other 50% to bonds.

Considerations and exceptions to the rule

When considering a withdrawal strategy, the 4% rule may or may not work in your favor. There are several factors at play that every retiree will need to consider in addition to individual circumstances.

Assessing investment risk tolerance, longevity and retirement duration

We are living longer, and this 4% rule Is based on a 30-year sustainability. Depending on when you retire, your health and genetics can define how long you’ll need a retirement income. If a longer retirement is expected or if you are a risk averse person and prefer a more conservative investing approach, you may need to change your withdrawal rate over time.²

• Healthcare expenses – there is no way to fully predict your health care needs as you age, but depending on your lifestyle and health, this price tag could be hefty especially if you enter some kind of assisted living later.
• Heavier upfront spending – the theory that most new retirees are more active in the first years of retirement and may require more than a 4% withdrawal upfront with potential adjustments to be considered later.
• Influence of market volatility – as market conditions fluctuate so will your need for spending and may require you to adjust your withdrawal strategy to preserve your balance.²
• Personal savings goals – depending on whether you want to spend your savings, such as more travel or leave a legacy of inheritance, will determine the rate of draw down and needs to be factored.²

There are many factors to consider including your personal goals and retirement planning wishes. Creating a personalized approach to your retirement income strategy could be the best way to maximize living well in retirement while ensuring a solid income stream over time.

A financial professional can help

You may want to consider reaching out to a Voya financial professional to guide you through a personalized retirement income plan that suits you and your situation so you can live well and retire well — well into your later years.