Learn About the 4 Percent Rule and Social Security

Understanding the 4 Percent Rule and How It Works

The 4 percent rule is a planning method that some people use when thinking about retirement spending. The basic idea is straightforward: if you have saved money for retirement, you can withdraw 4 percent of that total in your first year of retirement. In the years that follow, you adjust that withdrawal amount upward for inflation.

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Here's a concrete example. Suppose you have saved $500,000 by the time you stop working. According to the 4 percent rule, you would withdraw $20,000 in your first retirement year (4 percent of $500,000). If inflation that year is 2 percent, you would withdraw about $20,400 the following year, and so on.

The rule was created by a financial planner named William Bengen in 1994. He studied historical stock and bond market data going back to 1926 to figure out a withdrawal rate that would allow retirees to maintain their savings throughout a long retirement without running out of money. His research suggested that withdrawing 4 percent annually, adjusted for inflation, worked in nearly all historical scenarios tested.

The thinking behind the rule centers on balancing two needs: taking out enough money to live on while protecting your savings from depletion. If you withdraw too much each year, your remaining money may not grow fast enough to last through a long retirement. If you withdraw too little, you may live below your means when you could afford more comfort.

It's important to understand that the 4 percent rule is not a hard rule or law. It's a planning framework that some people find useful as a starting point for thinking about retirement spending. Different people have different situations, spending habits, and life expectancies. Your own retirement withdrawal strategy should reflect your specific circumstances and goals.

Practical Takeaway: The 4 percent rule suggests withdrawing 4 percent of your retirement savings in year one, then adjusting that amount upward each year for inflation. This framework can serve as a starting point when thinking through retirement spending, though it should be adapted to your personal situation.

The Research Behind the 4 Percent Rule

William Bengen's original 1994 research examined nearly 70 years of U.S. stock and bond market returns, dating back to 1926. He tested different withdrawal rates across various time periods to see which rates would have allowed a retiree to maintain their savings for at least 30 years without running out of money. He found that a 4 percent withdrawal rate, adjusted for inflation, was successful in approximately 95 percent of historical scenarios.

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Since Bengen's initial work, other researchers have expanded on these studies. A 2022 analysis by Morningstar looked at historical market data and modern economic conditions. Their findings suggested that the 4 percent rule still holds up reasonably well, though some scenarios—particularly those involving high initial stock valuations or prolonged market downturns—may require adjustments.

The research also examined what happens with different withdrawal rates. For instance, some studies found that a 3 percent withdrawal rate increased the success rate to over 99 percent across historical periods, while a 5 percent rate reduced success to around 70 percent. These numbers come from testing thousands of historical retirement scenarios using past market data.

One important finding from this research is that the sequence of returns matters greatly. This means that market performance in your early retirement years can significantly impact whether your savings last. If you experience poor market returns shortly after retiring, you may need to reduce withdrawals to protect your remaining savings. Conversely, strong early returns give your portfolio more cushion.

It's worth noting that historical research has limitations. Past market performance does not predict future results. Economic conditions, inflation rates, and investment returns may differ substantially from historical patterns. Additionally, research based on U.S. markets may not apply equally to international investors or to people with different life circumstances.

Practical Takeaway: The 4 percent rule emerged from research showing that this withdrawal rate historically worked in about 95 percent of 30-year retirement periods. However, success rates vary with different withdrawal rates and market conditions, and past performance does not guarantee future outcomes.

How the 4 Percent Rule Relates to Social Security

Social Security provides monthly income to workers who have reached their full retirement age, as well as to some spouses, children, and survivors. The average Social Security benefit in 2024 was approximately $1,907 per month, or about $22,884 per year. For many retirees, Social Security forms a significant portion of their total retirement income and reduces the amount they need to withdraw from personal savings.

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This connection is important when thinking about the 4 percent rule. If you have substantial Social Security income coming in, you may not need to withdraw 4 percent from your savings each year. For example, if your Social Security provides $30,000 annually and you need $50,000 per year to cover your expenses, you would only need to withdraw $20,000 from savings—which might be less than 4 percent of your total savings.

Conversely, if you have limited Social Security benefits or choose to delay claiming them, you may rely more heavily on withdrawals from retirement accounts like 401(k)s and IRAs. In this situation, the 4 percent rule becomes more relevant to your planning, since you're depending more on your personal savings.

The timing of when you start taking Social Security also affects your retirement planning. If you claim at age 62, your monthly benefit is permanently reduced compared to waiting until your full retirement age (66 or 67, depending on your birth year) or even age 70. The Social Security Administration estimates that waiting until age 70 increases your monthly benefit by about 76 percent compared to claiming at 62. This delayed claiming strategy reduces how much you need to withdraw from savings in your early retirement years.

Many financial planning approaches blend Social Security and personal savings withdrawal strategies together. You might plan to take modest withdrawals from savings in your early retirement years while delaying Social Security, then increase Social Security income later while reducing savings withdrawals. This approach attempts to make the most of both income sources over your lifetime.

Practical Takeaway: Social Security provides income that reduces how much you need to withdraw from personal savings. When planning your total retirement income using both Social Security and the 4 percent rule, consider your expected Social Security benefit amount and your claiming age, as both significantly affect your yearly income needs.

Limitations and Criticisms of the 4 Percent Rule

While the 4 percent rule provides a useful framework, financial researchers and advisors have identified several limitations. One major criticism is that the rule was designed based on historical data predominantly from the United States, where stock and bond returns have been relatively strong. Some analysts worry that future returns may be lower than historical averages, which could make a 4 percent withdrawal rate riskier than the past suggests.

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Another concern involves what's called "sequence of returns risk." If your portfolio experiences major losses in the first few years of retirement, withdrawing 4 percent of a now-smaller amount means taking out less money, but you've also damaged your portfolio's growth potential at a critical time. For instance, if your $500,000 portfolio drops to $400,000 in year one due to market decline, and you still withdraw 4 percent annually, you're now withdrawing from a smaller base, reducing future income.

The rule also assumes a fairly standard 30-year retirement period. If you retire at 55 and live to 95, your retirement spans 40 years—considerably longer than the 30-year assumption. Longer retirements require more careful planning, and a 4 percent withdrawal rate may not work as well across such extended timeframes.

Inflation assumptions in the rule can also be problematic. The rule assumes moderate, steady inflation. However, periods of high inflation—like the United States experienced in 2021-2023—can significantly erode purchasing power. If you withdraw 4 percent in year one and inflation spikes unexpectedly, your subsequent adjusted withdrawals may not keep pace with rising costs.

Additionally, the rule doesn't account for major unexpected expenses. Healthcare costs, home repairs, or helping family members can create spending spikes that the planned withdrawal amount doesn't cover. Some financial planning approaches suggest keeping a larger cash reserve or having flexibility to reduce spending in down years to address this challenge.

Life expectancy variations also matter. A 65