7 Reasons Not to Use the 4 Percent Rule

Most responsible savers planning for a comfortable retirement have probably heard of the famous 4 percent rule: If retirees withdraw 4 percent of their portfolio each year, adjusted annually for inflation, their money is likely to last for at least 30 years. But those who follow this withdrawal formula without question could run into issues during retirement. Here are seven nuances of the 4 percent rule you may not be aware of:

Mapping out a fixed withdrawal rate, then adjusting it for inflation 30 years into the future is psychologically almost impossible. The rule assumes that you will be able to tune out the fluctuations of the market, and just trust everything will work out. Can you imagine yourself being able to withdraw an amount from your portfolio calculated years ago even if the stock market drops 50 percent in value, like it did in 2008? If you can't, you already deviated from the plan, which brings unexpected outcomes into the picture.

Some people will continually calculate 4 percent of their portfolio every year and withdraw that amount instead. This strategy could work for you. The problem with this approach is that in bad years, 4 percent of the remaining portfolio may not cover your expenses. Can you live on just half of what you were living on if your portfolio experienced a 30 percent drop in value from the previous year? And plus, re-calculating 4 percent of your portfolio every year is a completely different strategy than the 4 percent rule. If you follow this path, all bets are off about your money lasting for 30 years.

Remember to consider taxes. Many people add up all their liquid assets and apply the 4 percent rule. But some investors forget to take into account how taxes will affect the safe withdrawal rate. The 4 percent rule assumes no tax drag, as if all your assets were held in a Roth IRA where there are no more taxes due, ever. The reality is that income tax will be due on all tax-deferred account withdrawals, and dividend and capital gains taxes will be owed on taxable accounts every year as well. How exactly that changes the ideal withdrawal rate is actually unknown because there are many variables in each person's situation, but make a mental note of this before you fully trust the 4 percent rule.

The 4 percent rule can encourage you to waste money. Most responsible retirees will probably only take what they need out of their retirement savings and nothing more. But if 4 percent turns out to be more than they need, that could cause them to just use up the funds. After all, there are so many ways to spend money.

Our expenses in the real world fluctuate more than inflation from year to year. This makes the 4 percent rule hard to implement in reality. We may have one, or even a few lean years, and then once in a while we may have a large expense. Every few years we may need to buy a car. Our grandchildren may be graduating, causing us to spend more on traveling. Whatever the case may be, expenses are hardly tied to the inflation rate from year to year.

The withdrawal rate is a probability that's based on historical performance. Everyone knows that past experiences don't predict the future, and that's true for investment performance as well. How much do you want to bet that your stock and bond portfolio will perform in a similar way to the past, when the world was a totally different place?

The study is based on 30 years of withdrawals. Some investors won't need 30 years of withdrawals, but some savers will need more. On a non-financial level, we'd like to live happily for as long as possible, but there's really no way to predict the length of our retirement decades in advance. Do you really want to run out of money when you should be celebrating living a whole century?

This is why you should only use the 4 percent rule as a guideline. By all means, start withdrawing 4 percent of your portfolio when you retire, but make sure you are ready to make adjustments in the years your investments don't perform the way you are hoping they will. With a flexible and responsible withdrawal plan, you should be able to avoid running out of money.

David Ning runs MoneyNing, a personal finance site that shares money moves you can make to significantly increase your chances of having a comfortable retirement. He likes to share simple changes that anyone can make, such as picking the best online savings account and figuring out whether a 0 percent balance transfer credit card makes sense.



More From US News & World Report

--

Get stories like this on the Yahoo app and discover more every day.
Download it now.
Loading...
  • Apple Said to Plan IPhone for Japan With Tap-to-Pay for Subways Bloomberg - 34 minutes ago

    A future iPhone will include technology called FeliCa, a mobile tap-to-pay standard in Japan developed by Sony Corp., according to people familiar with the matter. The FeliCa chip will let customers in Japan store their public bus and train passes … More »

  • Asian Stock Futures Mixed Before Jackson Hole With Oil Above $47 Bloomberg - 41 minutes ago

    Contracts on equity gauges in Japan and South Korea retreated, while those on indexes in Australia and Hong Kong foreshadowed gains following a second day of losses in U.S. shares. Japan’s currency headed for its first weekly drop versus the dollar … More »

  • Air New Zealand flies to record profit
    Air New Zealand flies to record profit AFP News - 1 hour 28 minutes ago

    Air New Zealand announced an operating windfall Friday, posting a record NZ$463 million (US338.01 million) after-tax profit, up 42 percent, as the country benefitted from a tourist boom. It was "the best result ever" in the 76-year history of the … More »

  • European, US equities dip awaiting Fed
    European, US equities dip awaiting Fed AFP News - 1 hour 37 minutes ago

    US and European stocks slid Thursday in choppy trade as investors awaited a key speech by Federal Reserve Chair Janet Yellen that many hope will shed light on the Fed's policy stance. With global economic growth in a slump and the US economy not … More »

  • Dollar General, Dollar Tree report weak sales growth
    Dollar General, Dollar Tree report weak sales growth Associated Press - 1 hour 48 minutes ago

    Discount-store rivals Dollar General and Dollar Tree reported weaker-than-expected sales figures Thursday, as struggling lower-income shoppers spent less at their stores. Shares of both companies fell ... … More »

  • Euro rises as markets tread water before Yellen speech AFP - 2 hours 1 minute ago

    The euro rose slightly on Thursday against the dollar, the yen and the British pound while investors awaited Friday's keynote address from US Fed chief Janet Yellen. Towards 2100 GMT, the euro was at $1.1281, ... … More »

  • Vegas stadium backers down to 2 top sites for Raiders
    Vegas stadium backers down to 2 top sites for Raiders Associated Press - 2 hours 15 minutes ago

    Backers of a proposed NFL stadium said they've whittled their list to two sites just west of the Las Vegas Strip and refuse to accept any less than $750 million in public funding toward the project, which ... … More »

  • Oil up on U.S.-Iran scare, dollar; Saudi output stance cuts gains
    Oil up on U.S.-Iran scare, dollar; Saudi output stance cuts gains Reuters - 2 hours 25 minutes ago

    Oil prices rose 1 percent on Thursday on U.S.-Iran military tensions in the Gulf and speculation the dollar will fall on a monetary policy speech due from the U.S. Federal Reserve chair. The market, however, gave back some gains after an interview … More »

  • Health care sector pulls stock market lower again
    Health care sector pulls stock market lower again Associated Press - 2 hours 30 minutes ago

    Stocks fell in light trading for a second day on Thursday as investors sifted through a mix of earnings reports. The major indexes wavered between small gains and losses in the morning, then moved lower ... … More »

  • Antrim reports 2Q loss Associated Press - 2 hours 32 minutes ago

    On a per-share basis, the Calgary, Alberta-based company said it had a loss of 1 cent. Earnings, adjusted for asset impairment costs, came to less than 1 cent on a per-share basis. In the final minutes ... … More »

  • Oil up on U.S.-Iran scare, dlr; Saudi output stance cuts gains
    Oil up on U.S.-Iran scare, dlr; Saudi output stance cuts gains Reuters - 2 hours 33 minutes ago

    Oil prices rose 1 percent on Thursday on U.S.-Iran military tensions in the Gulf and speculation the dollar will fall on a monetary policy speech due from the U.S. Federal Reserve chair. The market, however, gave back some gains after an interview … More »

  • How the Dow Jones industrial average fared on Thursday Associated Press - 2 hours 39 minutes ago

    Stocks closed lower on Thursday, led by declines in health-care companies as investors worry about a backlash in Washington against recent price increases for key drugs. A few retailers reported disappointing ... … More »

  • Earliest China Tea Leaves Signal Weakening Business Sentiment Bloomberg - 2 hours 45 minutes ago

    China’s policy makers have refrained from across-the-board monetary stimulus in recent months and switched to reining in risks emerging in the bond and property markets. “Both domestic and export demand remained sluggish, and unfavorable weather … More »

  • China’s Biggest Cities Said to Plan Curbs to Tame Property Boom Bloomberg - 2 hours 45 minutes ago

    Beijing and Tianjin are also contemplating new measures to rein in prices, according to three of the people. China’s top leaders, after a Politburo meeting led by President Xi Jinping last month, pledged to curb asset bubbles amid a renewed focus … More »

  • Hong Kong Regulator Wants a Tighter Grip on IPOs in Blow to HKEx Bloomberg - 2 hours 45 minutes ago

    While the Securities and Futures Commission and Hong Kong Exchanges & Clearing Ltd. have stated publicly that they’re working together on a new regime to approve IPOs, brokers and lawmakers say the proposal would shift power toward the regulator. … More »

  • Zayo Group reports 4Q loss Associated Press - 2 hours 48 minutes ago

    On a per-share basis, the Boulder, Colorado-based company said it had a loss of 13 cents. Earnings, adjusted to extinguish debt, were 1 cent per share. The results met Wall Street expectations. The average ... … More »

  • Exclusive - Exchange Bats eyes new EU base outside London after Brexit
    Exclusive - Exchange Bats eyes new EU base outside London after Brexit Reuters - 2 hours 49 minutes ago

    Europe's biggest stock exchange Bats Europe could open a base outside London following Brexit, its head told Reuters, voicing doubts about whether the City of London would secure sufficient access to the European market. Bats Europe accounts for … More »

  • Kerry arrives in Geneva for Syria talks with Lavrov
    Kerry arrives in Geneva for Syria talks with Lavrov AFP News - 2 hours 50 minutes ago

    US Secretary of State John Kerry arrived in Geneva late Thursday for a meeting with his Russian counterpart Sergei Lavrov to discuss the situation in war-ravaged Syria. Earlier Thursday, the UN special envoy for Syria Staffan de Mistura described … More »

  • US stocks edge lower ahead of Yellen speech AFP - 2 hours 56 minutes ago

    US stocks finished lower on Thursday ahead of a much-awaited speech by Federal Reserve Chair Janet Yellen that analysts hope will clarify the Fed's policy stance. Health care and pharmaceutical shares ... … More »

  • Hedge Funds Suddenly Winning on China’s Most Dangerous Short (1) Bloomberg - 3 hours ago

    After suffering through a 953 percent rally in shares of Yirendai Ltd. since mid-February, hedge funds and other bearish speculators were rewarded over the past four days as the Chinese peer-to-peer lender sank 35 percent in U.S. trading. Holding … More »

  • Net 1 UEPS posts 4Q profit Associated Press - 3 hours ago

    The Johannesburg-based company said it had profit of 48 cents per share. Earnings, adjusted for one-time gains and costs, came to 51 cents per share. The payments company posted revenue of $151.3 million ... … More »

  • Vivendi keeps negotiating with Mediaset despite public spat - sources
    Vivendi keeps negotiating with Mediaset despite public spat - sources Reuters - 3 hours ago

    PARIS/MILAN (Reuters) - French media giant Vivendi (VIV.PA) and Italian broadcaster Mediaset (MS.MI) are negotiating behind closed doors to forge an alternative partnership despite an ongoing war of words over a disputed pay-tv deal, three sources … More »

  • QAD Inc. posts 2Q profit Associated Press - 3 hours ago

    On a per-share basis, the Santa Barbara, California-based company said it had net income of 3 cents. Earnings, adjusted for stock option expense and amortization costs, were 15 cents per share. The manufacturing ... … More »

  • QAD posts 2Q profit Associated Press - 3 hours ago

    On a per-share basis, the Santa Barbara, California-based company said it had profit of 3 cents. Earnings, adjusted for stock option expense and amortization costs, were 15 cents per share. The enterprise ... … More »

  • Wall St. slips on healthcare, consumer names; Fed eyed
    Wall St. slips on healthcare, consumer names; Fed eyed Reuters - 3 hours ago

    U.S. stocks were modestly lower on Thursday, weighed down by a drop in healthcare and consumer names, while financials advanced slightly after two more Federal Reserve officials pushed the case for a rate hike. Healthcare stocks, down 0.8 percent, … More »

 
Recent Quotes
Symbol Price Change % Chg 
Your most recently viewed tickers will automatically show up here if you type a ticker in the "Enter symbol/company" at the bottom of this module.
You need to enable your browser cookies to view your most recent quotes.
 
Sign-in to view quotes in your portfolios.

MARKET MOVERS

  • Most Actives
    Most Actives
    NamePriceChange% Chg
    0.128-0.001-0.78%
    N21.SI
    0.355-0.010-2.74%
    E5H.SI
    0.59-0.01-1.67%
    5TP.SI
    1.00+0.01+1.01%
    Y92.SI
    0.785-0.010-1.26%
    BS6.SI
  • % Gainers
    % Gainers
    NamePriceChange% Chg
    0.45+0.09+26.76%
    AYB.SI
    0.465+0.080+20.78%
    E8Z.SI
    0.16+0.02+14.29%
    UV1.SI
    0.20+0.02+11.11%
    BGO.SI
    0.188+0.018+10.59%
    AWS.SI
  • % Losers
    % Losers
    NamePriceChange% Chg
    0.35-0.10-22.22%
    BFK.SI
    0.185-0.040-17.78%
    Y35.SI
    0.40-0.06-13.04%
    BBW.SI
    0.20-0.03-13.04%
    AWI.SI
    0.194-0.026-11.82%
    BLZ.SI

Market Data

  • Currencies
    Currencies
    NamePriceChange% Chg
    1.3523-0.0008-0.06%
    USDSGD=X
    1.5261-0.0006-0.04%
    EURSGD=X
    1.7840-0.0003-0.02%
    GBPSGD=X
    74.3310+0.086+0.12%
    SGDJPY=X
    5.7316+0.0034+0.06%
    SGDHKD=X
    2.9648+0.0008+0.03%
    SGDMYR=X
    9,821.0518+2.4668+0.03%
    SGDIDR=X
    4.9188-0.0015-0.03%
    SGDCNY=X
    1.0313+0.0007+0.07%
    AUDSGD=X
  • Commodities
    Commodities
    NamePriceChange% Chg
    1,324.30-0.30-0.02%
    GCZ16.CMX
    18.490.00-0.02%
    SIU16.CMX
    96.51+1.17+1.23%
    ^XAU
    2.080.000.00%
    HGU16.CMX
    47.34+0.01+0.02%
    CLV16.NYM
  • Bonds
    Bonds
    TreasuryYield (%)Yield Change
    1.16+0.01
    ^FVX
    1.58+0.02
    ^TNX
    2.26+0.02
    ^TYX