Unpacking the 4% Rule for Retirement-Portfolio Withdrawals
It's a useful starting point for retirement planning, but it's crucial to understand the assumptions behind it.
Note: This article is part of Morningstar's October 2014 5 Keys to Retirement Investing special report. An earlier version of this article appeared Jan. 26, 2012.
The so-called 4% rule has been in vogue for almost 20 years now, taking off in popularity since financial planner William Bengen introduced his research in 1994. This rule back-tested data to demonstrate that retirees withdrawing 4% of their portfolios per year for 30 years had a low probability of running out of money during their lifetimes. Several years later, the Trinity study, so named because it was authored by three professors at Trinity University in 1998, looked back at market data and generally corroborated Bengen's findings. The study concluded that retirees using a 3% to 4% withdrawal rate, combined with annual inflation adjustments, had a good chance of not running out of money during a 30-year period.