A Big Reason the Famous 4% Rule May Not Work for Your Retirement

There’s a reason so many people push themselves to save for retirement. You may end up needing a lot more than Social Security once your career comes to a close and you no longer have a job-related paycheck to rely on.

Social Security will replace about 40% of your pre-retirement wages if you’re an average earner. If you’re an above-average earner, those monthly benefits might replace an even smaller percentage of your former pay.

The more retirement savings you have, the more options you’ll buy yourself — and the less reliant on Social Security you’ll have to be. That’s an important thing at a time when benefit cuts are still on the table.

But if you’re going to hustle to build a retirement nest egg, you want that money to last. And that’s why it’s important to manage your IRA or 401(k) plan withdrawals strategically.

To that end, financial experts have long recommended using the 4% rule. This strategy has you withdrawing 4% of your savings balance your first year of retirement and adjusting future withdrawals for inflation.

The 4% rule is designed to make your retirement savings last for 30 years. So if you end your career in your 60s, there’s a good chance that following it will help you avoid running out of money in your lifetime.

But the 4% rule has a big flaw that could make it unsuitable for you. And it has to do with how you spend your money.

Retirement spending isn’t always linear

The 4% rule makes certain assumptions about your retirement timeline and investment mix. For example, it assumes you need your money to last for 30 years and that your portfolio contains a fairly even mix of stocks and bonds.

Another assumption the 4% rule makes has to do with your spending patterns. And it essentially assumes that your spending will be linear throughout retirement. But that may not align with your plans.

It’s common for people to spend more money early on in retirement so they can maximize years of good health and mobility. If you’re retiring at 65, for example, you may want to spend more money between then and age 70, since your health may be more optimal during that period than in your 70s, 80s, or 90s.

To put it another way, you may not be able to take your dream trip of hiking in the Swiss Alps at 86. At 67, it may be more than feasible. So you may be inclined to throw more money at travel early on in retirement, and spend a lot less in future years.

The 4% rule makes plans like that difficult, since it assumes your spending will basically stay the same from year to year, aside from adjustments related to inflation. And that’s a big reason it may not work well for you.

Feel free to use another strategy

While it’s OK to use the 4% rule as a starting point for managing your retirement nest egg, you shouldn’t feel compelled to lock yourself into it if it doesn’t align with your plans. However, if you’re not going to use the 4% rule, you do need to have a solid strategy in place — one you devise yourself or with the help of a financial advisor.

If you’re going to be spending more early on in retirement, then you may need extra savings to allow for a more generous budget. Or you may need to compensate in another way, like making sure your portfolio is invested in assets that generate strong returns.

But all told, there’s no reason to stick to the 4% rule if you find it too limiting. If that’s the case, figure out your income needs early on in retirement versus later, and run some calculations to make sure your nest egg can support your plans. If it can, then there’s no need to follow a withdrawal rule that doesn’t result in the retirement you’ve been dreaming of.