Pros and Cons of the 4% Rule

The 4% rule is a common guideline for withdrawing retirement savings. It has some advantages and disadvantages.

Anyone who is close to retirement or has done any retirement planning has probably heard of the 4% rule, but is the 4% rule what you should use for retirement income projections? Is it a concrete rule, or is it just a guideline?

As with many things in retirement planning, the 4% rule can be effective but should not be viewed as a legalistic rule. There has been extensive research on the 4% rule that proves it is a reasonably safe retirement income withdrawal rate. 

What Is the 4% Rule?

To make it very simple, the 4% rule states that a retiree could expect to be able to withdraw 4% of their beginning investment balance at retirement and increase that amount a little bit every year for inflation. In 1994, William Bengen’s retirement study concluded that 4% is a reasonable withdrawal rate. 

Retirees can make tweaks to the rule in regard to inflation, specific investment allocation, time periods, and even updates to the plan that could change the withdrawal rate up or down.

Why I Like the 4% Rule

I believe the 4% rule provides a great guideline for federal employees doing retirement planning. Regardless of how you do your retirement planning, it is going to involve assumptions for investment returns, inflation, and withdrawal rates. No one knows what the future holds and how much you are going to make on your investments in retirement; therefore, it’s difficult to come up with an exact number. This is where the 4% rule comes in. Add up your FERS annuity, Social Security, and 4% of your investment balance, and you have a good ballpark estimate of your total income for the year. If that income is more than your expenses, then you may be in good shape to retire.

There are many other ways of estimating retirement income, but the 4% rule provides a very simple and reasonable estimate of investment income. Advisors can often times get more technical using varying expenses in cash flow analysis and tools like a Monte Carlo analysis, which can be useful but the 4% rule is till a good starting point.

Why I Don’t Like the 4% Rule

The biggest reason I dislike the 4% rule is that spending, like many other things, is not static in retirement. Here are some reasons that spending may change in retirement:

  • Retirees are typically more active in their early years of retirement; some people call these years the “go go years.”
  • Retirees may incur big expenses in a given year; examples could include needing a new roof, purchasing a camper, acquiring a second home, or paying for a child’s wedding.
  • Retirees may have a couple years with lower expenses; an extreme example would be 2020 and 2021 when everything was shut down and there was nowhere to go.
  • Retirees often stop “going” later in life.

Distributions rates could also change due to the age of the retiree. A law enforcement officer retiring at age 48 with a 40 year life expectancy should probably have a different distribution rate than the 70 year old retiree who has a 20 year life expectancy.

Another reason I don’t like the rule is that your income may change in retirement. The best example of this is when a federal employee delays Social Security. A federal employee who retires at Minimum Retirement Age (MRA) would collect the FERS annuity and special retirement supplement, but the supplement will end at age 62. It ends at age 62 because that is the age you can begin collecting Social Security, but not everyone begins collecting Social Security at this point. If you decide to delay collecting Social Security until age 70, then you would have an eight-year gap that would require you to withdraw more money from your investments, which would likely violate the 4% rule. Income could also change due to a spouse’s pension kicking in at a specific age.

The most important rule guideline in retirement planning is to be responsible. Everyone has years where their spending will be different than 4%, and that’s okay. The important thing is to understand what you are doing and not jeopardize your retirement by continuing to spend in excess. You could also find yourself paying excessive taxes later in life if you spend less than 4% and don’t do any planning.

About the Author

Brad Bobb is a financial planner with over a decade of experience working with federal employees. He is acutely focused on the financial livelihood of employees who are part of the CSRS or FERS systems. Any federal employee wanting more information about Brad can visit