Revisiting the 4% Rule for Retirement

by TTMK on June 25, 2012 · 12 comments

How much do you think you will need for retirement?

It’s a question that has answers that probably vary from person to person. Sure, we each probably have a set of true needs that are somewhat consistent. However, we also each have will have our own medical and family situations which will impact how much we need for retirement. Plus, let’s face it: some of us will have different wants than others.

What all boils down to is that we need to work on saving for retirement and getting ourselves in a position to have a comfortable existence later in life, at a minimum. Along those lines, it’s often been said that we should be able to have a nest egg saved that will allow us to have a 4% withdrawal rate in retirement.

The idea behind this widely used 4% withdrawal rate in retirement is that if we withdraw 4% of our accumulated savings, and adjust that for inflation annually, we should be able to have enough for retirement needs over a 30-year time period.

For example, let’s say that somebody has $500,000 in savings. If they withdraw 4% annually – or $20,000 – they will be able to survive for 30 years on that money.

I brought that figure up because I recall a conversation with a co-worker who was talking about lottery winnings, or rather what one could do in the event of winning a lottery. When the figure $500,000 came up, he remarked that a person might be able to retire on such an amount. I disagreed, and he looked at me sideways as if I was crazy.

Well, when you think about it, if you want to keep a 30 year time frame, I think that there are three things that come to mind:

1) We will need a lot more savings than we might realize. Think about it – $20,000 a year for retirement? That’s not going to fly for most people, especially those in high cost of living areas. Even if you layer in social security, I don’t see that working too well.

2) 4% might be too aggressive. Would it be more conservative, and safer, to assume a lower withdrawal rate? Like perhaps 3%? Given the variability in markets and investment returns, it seems like it could be better to be safe than sorry.

3) We may have to work longer than we want to. Ah, but here’s the catch: we often can’t work when much older. How easy is it for somebody older to get a well-paying job? How easy is it for somebody older to be healthy enough physically and mentally to meet the demands of a job as well as a much younger, energetic counterpart? These are all factors going against planning on working when older, but unfortunately some folks may have to do so. Just try not to count on it though!

My Questions for You
Have you given thought to how much you’ll need for retirement?

What do you think about the 4% withdrawal rate concept? Do you think that percentage is right, or should it be different?

What are your thoughts on the ideas that we may need more than we think, and that we might not be able to work as long as we would want to?

{ 12 comments… read them below or add one }

Andrea @SoOverDebt June 25, 2012 at 5:04 pm

Retirement is a sore subject for me these days. Before I became self-employed, I invested through a Roth IRA because the options at my former employer were so terrible. Last year I was able to get about halfway to the $5k max, and I really had hopes that I would max it out starting this year. But, because I’m in a transition period and my income is so erratic, my savings is way off track.

I like a smaller withdrawal percentage because I think we can’t always depend on dying within 30 years. My great-grandmother is 92 years old and still lives on her own – if she had started withdrawing from my great-grandfather’s retirement at 4% when he turned 65, she’d be out of money. (He was 4 years older than her.) She lives on very little and has been lucky to stay in good health; otherwise I’m not sure how she would be making it.

I can’t ever imagine not working, but I know I need to be prepared for the fact that I may not be able to work forever. And I definitely think I’ll need more money in retirement than I can picture needing right now. When I look at the way costs have risen in my lifetime already, I know that I need to be storing away as much money as I possibly can.

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TTMK June 25, 2012 at 11:13 pm

Andrea – thanks for the detailed comment. I think we see it similarly, in terms of the notion of a) thinking that more will be needed in retirement than can be pictured now, and b) needing to store away as much money as possible. We can’t always count on a short retirement span, and we can’t count on stable returns in the market – much less what crazy health issues could find us at different points in life.

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Kathleen @ Frugal Portland June 26, 2012 at 2:13 pm

I haven’t given much thought to retirement, but my guess is I’ll be working in some capacity forever.

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TTMK June 28, 2012 at 6:19 pm

Kathleen – best to think of retirement, as we can’t work forever!

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Edward Antrobus June 27, 2012 at 1:13 am

I plan on my retirement being like what people used to think of as retirement, that short period in between you are no longer able to work and no longer able to breathe. It was 5 years for my grandfather. In that case, I could afford to withdrawl 20% of my savings.

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TTMK June 28, 2012 at 6:20 pm

Edward – hopefully we can all work a long time, though I would rather be safe than sorry. I sure hope that the gap between ending work and The End is quite a long time, and by my choice! A long way to go though, to reach retirement by my choice.

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LaTisha June 27, 2012 at 8:57 am

I guess everyone has a number but I really haven’t decided on mine yet. I guess cash flow of 50k a year in retirement would be nice.

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TTMK June 28, 2012 at 6:20 pm

LaTisha – after tax cash flow of that amount would work for a lot of us, right?

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Paul @ The Frugal Toad June 27, 2012 at 10:44 am

The 4% rule relates to how much you can safely withdraw from your retirement account without running out of money. The 4% refers to the first withdrawal only and each withdrawal in future years is increased by the rate of inflation. In theory this ensures your funds will last a minimum of 30 years. Of course results depend on things like portfolio makeup and performance, rate of inflation, etc.

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TTMK June 28, 2012 at 6:21 pm

Paul – yep, you’re right on with that.

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Miss T @ Prairie Eco-Thrifter June 27, 2012 at 2:02 pm

We have talked about an amount but we haven’t set one in stone. Like you mentioned things can change and inflation will always be there. I think we have a ball park but we aren’t going to stop right when we hit it; we will reevaluate things and go from there.I don’t think we will ever stop saving.

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TTMK June 28, 2012 at 6:22 pm

Miss T – I’m with you on the notion of continuing to save!

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