The 4% Withdrawal Rule: A Practical Look at Retirement Income

4% Withdrawal Rule

In October 1994, William Bengen published a significant paper titled "Determining Withdrawal Rates Using Historical Data" in the Journal of Financial Planning.¹ This paper introduced what became widely known as the 4% Rule, a guideline for retirement portfolio withdrawals that has since become a cornerstone in financial planning.

Bengen's research, based on approximately 400 different scenarios, assumed that initial withdrawals would be 4% of the portfolio's value and would increase annually to account for inflation. A key assumption was a minimum portfolio longevity of 30 years. As Bengen stated, regarding a 4% inflation-adjusted starting withdrawal rate, "In no past case has it caused a portfolio to be exhausted before 33 years, and in most cases, it will lead to portfolio lives of 50 years or longer."¹

While financial planners widely adopt the 4% Rule as a "safe" withdrawal rate, it has also sparked considerable debate.

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The Core Challenge: Unpredictability

The central challenge with any fixed withdrawal rule is the inherent unpredictability of the future. Factors like the global economy, inflation rates, and equity market performance are notoriously challenging to forecast

For retirees, the primary concern is ensuring their assets last throughout their lifetime. However, not everyone wants to leave a substantial inheritance, preferring instead to enjoy their retirement without excessive frugality. This creates a dilemma: how can retirees mitigate the risk of outliving their savings without sacrificing their desired lifestyle?

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Strategies for a Sustainable Retirement Income

Here are some strategies retirees can consider to navigate these challenges:

1. Incorporate a Lifetime Income Annuity: To protect against outliving your income, consider integrating a lifetime income annuity into your financial plan. This can provide a guaranteed income stream for life, regardless of market fluctuations. (For more on this, see our blog post: A Time-Tested Retirement Income Strategy.)

   
   

2. Explore Adaptive Income Strategies: Instead of a rigid inflation-adjusted approach, consider more dynamic income strategies:

   
   

   • The "Smile Strategy": This approach suggests starting with a higher withdrawal rate early in retirement and gradually decreasing withdrawals as you age, while still accounting for inflation. In later years, withdrawals may increase again to cover rising medical expenses.

     
     

   • Setting Guardrails: With this strategy, you establish an initial withdrawal rate.⁷ If your withdrawal rate increases by a predetermined percentage (e.g., 20% due to market downturns), you would then reduce your spending by a set amount (e.g., 10%).⁸ Conversely, if your withdrawal rate decreases significantly, you could increase spending.

     
     

   • Floor and Ceiling: This involves adjusting your spending up or down by a specific percentage based on your portfolio's performance.¹⁰ For example, you might increase spending if your portfolio performs exceptionally well or decrease it if performance is poor.

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The Importance of Personalized Planning

It's crucial to understand that there's no single "perfect" strategy, and every approach carries some level of risk. In our experience, many clients struggle to cut expenses when necessary, especially those with limited discretionary spending.

Retirement income planning is deeply personal, dependent on each individual's or couple's unique circumstances, goals, and risk tolerance. This is why it's highly advisable to hire a financial planner. A professional can help you develop a customized strategy that aligns with your specific needs.

Many people readily invest time and money into planning a two-week dream vacation, yet they often hesitate to dedicate the same effort to planning for the rest of their lives. Taking the time to plan your retirement income can provide peace of mind and help ensure your financial security.

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For pricing on a personalized retirement income plan, please visit the "Let's Connect" page on the Synergy Wealth Management website and fill out the

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¹ Bengen, William P. 1994. “Determining Withdrawal Rates Using Historical Data.” Journal of Financial Planning 7 (4): 171–180.

Disclaimers:

Investment advice offered through Stratos Wealth Advisors, LLC,

a registered investment advisor. Stratos Wealth Advisors, LLC and

Synergy Wealth Management are separate entities.

Content in this material is intended for general information purposes only and should not be construed as specific investment advice or recommendations for any individual.  Please contact your advisor with any questions or for specific recommendations regarding your own circumstances. Investing involves risks including possible loss of principal. There can be no assurance that a specific strategy will yield a profitable result or protect against losses.