The 4% rule is a popular retirement withdrawal strategy that suggests retirees can safely withdraw the amount equal to 4% of their savings during the year they retire and then adjust for inflation each subsequent year for 30 years.
You would withdraw $40,000 in your first year of retirement. If the cost of living rises 2% that year, you would give yourself a 2% raise the following year, withdrawing $40,800, and so on for the next 30 years.
Late last year, research firm Morningstar affirmed 4% as the safe withdrawal rate, up from 3.8% in 2022 and 3.3% in 2021. The rule was developed in 1994 by financial planner Bill Bengen, who researched historical market conditions and found that a 4% withdrawal rate worked across all of them.
The 4% rule is a popular estimate for how much money you'll need to save to last 30 years in retirement. But whether you choose to follow the updated 3.3% guideline or stick with the traditional 4% rule of thumb, figuring out your retirement number is only part of the work.
Tax Ramifications of the 4% Rule
“Four percent goes to you to support your cost of living, while the remaining 2% to 3% stays in your portfolio to continue to grow to account for inflation.”
The 4% rule is a popular retirement withdrawal strategy that suggests retirees can safely withdraw the amount equal to 4% of their savings during the year they retire and then adjust for inflation each subsequent year for 30 years.
The 4% rule and Social Security
You may be wondering how you include your future Social Security income in this equation, and the simple answer is, you don't. It wasn't designed to take that into account.
Once you reach 59½, you can take distributions from your 401(k) plan without being subject to the 10% penalty. However, that doesn't mean there are no consequences. All withdrawals from your 401(k), even those taken after age 59½, are subject to ordinary income taxes.
With $100,000 you should budget for a retirement income of around $5,000 to $8,000 on top of Social Security, depending on how you have invested your money. Much more than this will likely cause you to run out of money within 25 – 30 years, which is potentially within the lifespan of the average retiree.
Based on the 80% principle, you can expect to need about $96,000 in annual income after you retire, which is $8,000 per month.
One example is the $1,000/month rule. Created by Wes Moss, a Certified Financial Planner, this strategy helps individuals visualize how much savings they should have in retirement. According to Moss, you should plan to have $240,000 saved for every $1,000 of disposable income in retirement.
Around the U.S., a $1 million nest egg can cover an average of 18.9 years worth of living expenses, GoBankingRates found. But where you retire can have a profound impact on how far your money goes, ranging from as a little as 10 years in Hawaii to more than than 20 years in more than a dozen states.
As mentioned above, $3 million can easily carry you through 40 years of retirement, making leaving the workforce at 50 a plausible option. Many dream of early retirement, but if you're lucky enough to already have $3 million set aside for this phase of your life, you could do more than dream.
This guideline, which was developed in the 1990s, suggests withdrawing 4% from your savings in your first retirement year and then adjusting subsequent withdrawals for inflation. Doing so from a balanced portfolio all but ensures your money lasts 30 years. The 4% rule's creator, financial advisor William P.
$300,000 can last for roughly 26 years if your average monthly spend is around $1,600. Social Security benefits help bolster your retirement income and make retiring on $300k even more accessible. It's often recommended to have 10-12 times your current income in savings by the time you retire.
Without including income from other sources, this would leave you with a monthly income of just $417. While this figure will be higher if you factor in income from other sources – such as Social Security, which, in 2022, was approximately $1,825 a month – this figure is still quite low.
Most American households have at least $1,000 in checking or savings accounts. But only about 12% have more than $100,000 in checking and savings.
Deferring Social Security payments, rolling over old 401(k)s, setting up IRAs to avoid the mandatory 20% federal income tax, and keeping your capital gains taxes low are among the best strategies for reducing taxes on your 401(k) withdrawal.
If you retire with no money, you'll have to consider ways to create income to pay your living expenses. That might include applying for Social Security retirement benefits, getting a reverse mortgage if you own a home, or starting a side hustle or part-time job to generate a steady paycheck.
States That Don't Tax Retirement Income
Those eight – Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington and Wyoming – don't tax wages, salaries, dividends, interest or any sort of income.
Housing expenses—which include mortgage, rent, property tax, insurance, maintenance and repair costs—remained the largest expense for retirees. More specifically, the average retiree household pays an average of $17,454 per year ($1,455 per month) on housing costs, representing over 35% of annual expenditures.
Retiring at 62 with little money could be workable if you plan to relocate to an area with a lower cost-of-living, and cut your expenses. It also helps if you have additional money from Social Security, a pension, or an annuity that you can count on.