The 4% Rule

Calculate your withdrawal rate

William Bengen, a certified financial planner, published what has come to be referred to as the 4% rule, which states that if you want your retirement savings to last, you should withdraw no more than 4% of your savings each year. The exact percentage depends on many factors, including how long you live.

As a guide, you can use the 4% rule to help estimate how much income you can withdraw from your savings each year. Circumstances may vary so be sure to look carefully at your individual plan.

To calculate the amount you need saved to retire:

  1. Determine your desired annual retirement income.
  2. Subtract your estimated annual income from pensions and military retirement pay.
  3. Subtract your estimated annual income from Social Security. Visit the Social Security website (ssa.gov) to review your statement and estimate your benefits.
  4. Divide the remainder by 0.04 if you are using a 4% withdrawal rate. (Or, divide by 0.03 if you are using a 3% withdrawal rate.)

Assuming a withdrawal rate of 4%, for every dollar you want to withdraw annually during retirement, you need to have $25 in assets set aside at the time you retire.

Example 1

Specialist Lewis wants $50,000 in annual income during retirement. He plans to retire from the military after 20 years of service, and he estimates that his military retirement pay will be $20,000 a year. He estimates social security benefits totaling $20,000 a year. To earn the remaining $10,000 a year on his investments, he needs a portfolio of $250,000 by the time he retires. That is because $10,000 is 4% of $250,000.

Desired retirement income   $50,000
Military retirement pay – $20,000
Social Security – $20,000
Investment income needed   $10,000
4% withdrawal rate ÷ 0.04
Total investment assets needed $250,000

Example 2

Naval pilot Hernandez wants $80,000 in annual income during retirement. He doesn’t have a pension, and he left the military before qualifying for military retirement pay. He estimates social security benefits of $20,000 a year. To earn the remaining $60,000 a year on his investments, he needs a portfolio of $1.5 million dollars by the time he retires. That’s because $60,000 is 4% of $1.5 million.

Desired retirement income   $80,000
Social Security – $20,000
Investment income needed   $60,000
4% withdrawal rate ÷ 0.04
Total investment assets needed $1,500,000

 
To decide how much money you’ll need to retire, you’ll need to consider your own retirement spending needs and your own sources of income.

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