The 4% withdrawal rule has been a staple in retirement planning for decades. It suggests that retirees can withdraw 4% of their portfolio each year, adjust it for inflation, and expect their money to last throughout retirement—typically around 30 years or more. However, in today’s market, many are asking: Does the 4% rule still work?
A Look Back: The 4% Rule’s Origins
The 4% rule gained popularity in the 1990s when the markets were booming. For example, a retiree with a $1 million portfolio could withdraw $40,000 in the first year and, thanks to strong market growth, might even see their portfolio grow. Back then, the rule seemed almost too good to be true—withdraw 4%, and your money could last a lifetime.
But the landscape has shifted. The early 2000s and the 2008 financial crisis showed how vulnerable this strategy can be. If the market takes a downturn after you start withdrawing, your portfolio can lose significant value in the early years of retirement. For example, if you start with $1 million, take out $40,000, and then face a market crash that reduces your portfolio by 50%, you’re left with $500,000. Reducing your withdrawals to match the new portfolio value could force you to significantly cut your standard of living, which is something most retirees want to avoid.
Can the 4% Rule Still Work?
The answer is: It depends. If the market continues to grow steadily, the 4% rule might still work. However, if there’s a downturn, your plan could be in jeopardy. That’s why it’s important to build a retirement plan that accounts for market volatility.
At Sullivan Financial Partners, we emphasize the importance of an income plan as the foundation of your financial strategy. A good income plan ensures your lifestyle is supported no matter what happens in the stock market. By using various tools and strategies to guarantee your income, we can allow your remaining assets to grow in the market without affecting your standard of living.
If you haven’t reviewed your retirement income plan recently, now might be a good time. If you’re unsure about your strategy, we’re here to help. Let’s make sure you’re set up for a confident retirement journey.