Is the 4% Withdraw Rule Still Relevant?

 By Brian McGeough, CFP® and Senior Relationship Manager

CWM Stock

Many of our clients are already retired and thinking about increasing their withdrawal percentage from their retirement accounts. This “4% rule” is a guideline developed in the mid-1990s on how much a retiree can withdraw from their accounts without running out of money. The rule suggests that retirees can withdraw 4% from their retirement accounts and adjust for inflation annually so that their assets will last 30 years. A lot has changed since the ‘90s so it is reasonable to ask if the 4% rule is still valid in 2025.

There are several factors to consider to see if the 4% rule is still relevant:

1) Longer life expectancy – From 1995 – 2025 the life expectancy in the United States has increased from 75.8 years to 79.4 years. Retiree’s money will have to last longer than in 1995.

2) Lower bond yields – The original 4% was based on bond yields in the 1990s. The yield on the 10 year treasury has dropped from 7.5% in 1995 to just below 5% today. Fixed income investments are now generating less income than in 1995.

3) Rising healthcare costs – In 1995 it was estimated that a retiree’s lifetime healthcare cost was between $100,000 to $120,000. Medical costs have risen faster than inflation at around 5-6% per year. In 2025 it is estimated that a 65 year old retiring today will need $315,000 for healthcare in their lifetime.

4) Sequence of returns risk – Withdrawing in a market downturn early in retirement can have a significant impact on portfolio. I published a blog on May 1st titled, Has Your Retirement Been Stress Tested? that can be found on our website at https://www.chathamwealth.com/blog/has-your-retirement-plan-been-stress-tested.

Ways to reduce the impact on the 4% rule:

1) Dynamic withdraws – Adjust withdraws based on market returns. If possible, withdraw less in down markets

2) Start your retirement with a lower withdraw rate

3) Diversification – Adjust and diversify your portfolio to lower downside risk and volatility

4) Other income sources – Dividends, interest and rental incomes are a great way to supplement your retirement income.

At Chatham Wealth Management, we help people plan for retirement and how to create income replace for retirees. Please contact us at (800) 472-8086 or check us out at www.chathamwealth.com.

Disclosure

• Chatham Wealth Management is registered as an investment adviser with the SEC. SEC registration does not constitute an endorsement of the firm by the Commission, nor does it indicate that the adviser has attained a particular level of skill or ability.

• Past performance may not be indicative of future results. All investment strategies have the potential for profit or loss. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment or strategy will be profitable for a client's portfolio.