Retirees: How to Make the 4% Rule Last in Retirement

A world of high inflation, poor stock returns, and a dwindling Social Security reserve can be unnerving to retirees.

Given the tumultuous start to the year for the S&P 500, it's no wonder retirees and pre-retirees are nervous about the prospect of entering a prolonged bear market. Combine poor stock performance with a low-yielding bond environment and the possibility that Social Security reserves may deplete, and there is fair reason to be concerned. However, as we'll explore below, there are several ways to make retirement withdrawals even more sustainable — and to ensure you're covered in a variety of future circumstances.

Reviewing the 4% rule

The 4% rule as it relates to your personal savings is meant to act as a general rule of thumb. Taking your retirement savings as a whole, you can withdraw 4% annually (adjusted for inflation) and face only a minimal probability of running out of money over the course of a 30-year retirement. 

The 4% rule has also come under fire as of late, as the concept was developed when bonds were yielding far more than they do today, and during a time when the 60% stock/40% bond portfolio was seen as the norm for aspiring retirees.

This has led financial planning experts to question whether the 4% rule would hold up in today's low-interest, high-inflation, and low-expected-return stock market environment.

Options available to current or aspiring retirees

Someone who wants to retire in the coming years might try any of the following strategies to help make their savings last:

  • Consider a variable spending strategy: Instead of taking 4% from your savings in years when the market experiences a downturn — or worse, a recession — investors might consider simply adjusting their withdrawal rates from 4% to 3%, if possible. When the market recovers, think about increasing spending to 5% or even higher. Such a strategy can prevent a retiree from selling stocks amid a decline, which can preserve the portfolio's ability to grow in the future. 
  • Skip the inflation adjustment: While this might seem unthinkable in a year when we've experienced decades-high inflation, it's another tool in the box to preserve your retirement savings. If you were to save $1 million for retirement and withdrew 4%, or $40,000, in the first year, keeping your annual withdrawal constant — instead of adjusting it upward by over 8% — can help preserve principal in the long run. Of course, this may not be possible if you're depending only on personal savings to cover costs in retirement. 
  • Focus on guaranteed income: Retirement fixtures like pension plans, Social Security, and certain annuity types can act as incredibly effective antidotes during times of stock market turmoil. In a perfect world, guaranteed income can help you cover known costs like food, housing, and healthcare, while personal savings can be relied upon for additional spending. One of the lowest-hanging fruits is to delay filing for Social Security benefits as long as possible, as you'll receive inflation adjustments plus an 8% bump for every year you delay. 

Make the most out of your portfolio

The current stock market landscape can make any investor's stomach turn. Nonetheless, retirees and pre-retirees alike will need to develop strategies to make their retirement savings last even longer than expected. Adopting a flexible spending strategy, limiting inflation adjustments, and relying more on guaranteed income can make a huge difference when it comes to concerns around portfolio depletion. There is also the option of picking up additional part-time work in retirement, but that can be dependent on a number of limiting factors, including health status and family circumstances. 

The 4% rule was developed over a period of decades and accounted for numerous negative financial system shocks. It's still viable as a rule of thumb, and still should be seen as a great place to start when determining how much you can take from your investments every year. At the same time, building a sustainable financial fortress around your investment portfolio will likely prove to be as important as ever in the coming decade. Be prepared for any scenario, and enter retirement with confidence. 

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