We don’t talk much here about investments specifics. It’s a topic we feel is much too detailed and variable to give broad based advice. There are a lot of general, rules of thumb investment advice out there, but we feel there isn’t one right answer for everyone, there aren’t even a few right answers. So, since each specific situation requires its own specific answer, we tend not to talk about it. However, today, we’re going to talk briefly about a certain financial planning rule of thumb.

Last week, over at U.S. News – Money, there was a post by Roger Wolhner entitled “Using the ‘Four Percent Rule’ for Retirement Planning.” The four percent rule is a very well-known rule of thumb in the financial planning community. For those who don’t know what it means, the four percent rule says that in general, you can safely take up to 4% of your portfolio balance annually in withdrawals without running out of money in retirement (30 years or more).

Just like with any rule of thumb, the four percent rule is not set in stone, and it may not work for everyone. Wolhner gives some great example of situations where the four percent rule doesn’t necessarily pan out:

  • “What if you need more than 4 percent annually?
  • What do you do if you live to be 100 or 110?
  • What if you get really spectacular returns in your first few years of retirement so that by the time you’re 95, you find you have a much bigger surplus than you expected? You may realize that you could have afforded a more comfortable lifestyle during retirement.
  • What if, in the first few years of your retirement, the stock market drops by 45 percent?”

Have you ever considered how much you will need to draw down from your portfolio once in retirement? If you’re nearing retirement, take a look at what you think your income is going to need to be. After looking at what you might make through other sources of income (pensions, Social Security, etc.), how much more income will you need? If you pull that needed income from your portfolio, what percentage of the total balance will it account for?

We can’t tell you whether the four percent rule will work for your situation. However, we will say that if you think you will need to pull more than four percent, be very cautious about it. Over withdrawing from your portfolio can lead to balances dropping at a rapid pace when your returns can’t keep up. Be sure to know your situation well and understand that how much you withdrawal will have an effect on your future.


  • Disclaimer: The information on this blog is not meant for specific financial advice. The ideas/opinions stated are not suited for everyone, and readers should use their own judgment in applying them in their financial lives.