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Here are 5 factors that could derail the 4% rule in retirement
USA Today • • business
Key Points:
- The 4% rule, created in 1994 by Bill Bengen, advises retirees to withdraw 4% of their savings in the first year of retirement and adjust that amount for inflation annually, aiming to make savings last for 30 years.
- High advisory and fund management fees, which can total around 2% annually, reduce investment returns and make it more difficult to sustain withdrawals based on the 4% rule.
- The rule is based on historical U.S. market performance from 1926 to 1976, but future market returns may be lower, and the rule may not hold in other countries or during prolonged bear markets.
- Early retirement and increased life expectancy can extend retirement beyond 30 years, potentially causing retirees to outlive their savings if they rely solely on the 4% rule.
- Cognitive decline in older age can impair financial decision-making, increasing risks related to managing withdrawals and vulnerability to scams, while long-term care costs, which are often high and unpredictable, are not accounted for in the 4% rule’s static spending assumption.
