How to Not Outlive Your Money: Rethinking the 4 Percent Rule

It may seem like a fairly safe bet: Withdraw no more than 4 percent from your retirement savings each year, and you’ll have enough money to last the rest of your life.

After all, the biggest fear for many people facing retirement is the possibility of outliving their savings.

Many financial advisers have relied on the rule that says a retiree’s nest egg should last a lifetime as long as they withdrawal 4 percent a year. However, some certified financial planners now say the old “4 percent rule” could put your retirement savings at risk.

“I don’t think the 4 percent rule is as feasible today as it was in the past, and the reason for that is because the market returns haven’t been as consistent as we’ve seen in the past,” said Richard Coppa, managing director of Wealth Health LLC.

(Read More: Self-Employment Can Help Boomers, Retirees Stretch Savings)

The “4 percent rule” was calculated back in the 1990s and was based on a model portfolio that contained a certain mix of stocks and bonds—60 percent large-cap stocks and 40 percent intermediate-term government bonds.


But times have changed. With historically low bond yields and a volatile stock market, Coppa says the “4 percent rule” may no longer be as safe.

“In the last decade, we’ve seen a dotcom bubble, we’ve seen a real estate bubble, we’ve seen a financial crisis, and all of that impacts the types of returns we’re getting on both stocks and bonds,” he said.

To make sure clients don’t outlive their savings, Coppa advises them to get a handle on their cash flow. Managing income and expenses in retirement is more important than relying on any rule, he said.

The bottom line—knowing what you’ll be spending is the best way to determine what you’ll be able to withdraw, Coppa added.

However, certified financial planner Doug Lockwood of Harbor Lights Financial Group said it is possible for retirees to withdraw 4 percent a year from savings and have the money last—as long as the mix of assets is well-diversified. A model portfolio of 60 percent stocks and 40 percent bonds could work, depending on the type of equities.

“You have to look at not only interest rates and bond rates that you can draw upon but where am I getting my income from my equities,” Lockwood said. “At that point, you have to look at dividend paying stocks to grab that equity yield which is quite frankly a better bet these days (than bond yields).”

Depending on your age and risk tolerance, Lockwood said a 4 percent withdrawal rate is a good guideline for gauging whether you’ll have enough money in retirement. However, he added, you should also consider the impact of taxes and inflation on your investments.

“With inflation and taxes that investor who wants to be able to draw 4 percent has to be able to make at least a 7 percent return on average to be able to get that 4 percent in their pocket. That can be challenging at times,” Lockwood admitted. “A lot of folks are just not invested appropriately to be able to address that type of need.”

(Watch: No ‘One Size Fits All’ When it Comes to Financing Retirement: Adviser)

Lockwood and Coppa agree the most important factor in being able to follow the “4 percent rule”—and not outlive your nest egg—is to try to save more. Increasing your retirement contributions to reach the maximum annual limit for 401(k)s and IRAs still may not be enough, you may have to add more money to taxable accounts earmarked for retirement as well.

In the end, how much money you put in will ultimately determine how much you’ll have to take out.

—Follow Sharon on Twitter @sharon_epperson

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