The 4% Rule in Retirement

Many of us make it a point to save money for retirement. This can take many forms, including putting money into a 457(b) account, an IRA, or a savings account. But how many of us have a gameplan for how those funds will be spent? Spending the money too quickly can leave you without a financial safety net in your golden years. There are many strategies you can use to make sure you don't outlive your money, each with their pros and cons. We're going to briefly talk about the 4% rule.

The 4% rule works like this: you take 4% of your retirement account balance in your first year of retirement. The following year, you withdraw the same 4% plus the rate of inflation for that year. In your third year, you will take the amount you withdrew in the second year plus the rate of inflation for the third year. You keep repeating this every year. Here's a quick example:

You have $100,000 in your 457(b) plan when you retire. In year one, you withdraw 4%, which is $4,000. The rate of inflation the following year is 2%, so you will withdraw $4,080 ($4,000 plus 2%). The rate of inflation the third year is 5%, so you will withdraw $4,284 ($4,080 plus 5%).

If you follow this while having your portfolio comprised of 50% stocks and 50% bonds, there is a high likelihood that your money will last a minimum of 35 years. Retiring at 50 would mean this strategy would likely mean you would not run out of money through your mid-80s (possibly even longer).

Keep in mind that larger withdrawals, especially early on, can significantly shorten the life expectancy of your retirement fund. So if you take out more than you should, your money will likely last much shorter. Same goes for sustained high inflation rates, an underperforming portfolio, or a portfolio that is too bond-heavy.

Again, this is one of many ways to structure withdrawals. It might not be suitable for your specific needs. A financial planner can help you figure out the best way to manage your retirement account.