Three Percent Rule (2024)

FAQs

Is 3% a safe withdrawal rate? ›

Similar to Bengen, the study concluded: If history is any guide for the future, then withdrawal rates of 3% and 4% are extremely unlikely to exhaust any portfolio of stocks and bonds during any of the payout periods… And, just like that, the safe withdrawal rate and the 4% rule were born.

Follow the 3% Rule for an Average Retirement

If you are fairly confident you won't run out of money, begin by withdrawing 3% of your portfolio annually. Adjust based on inflation but keep an eye on the market, as well.

The 4% rule is a widely known guideline for retirement spending that says you can safely withdraw 4% of your savings the first year, then adjust withdrawals for inflation annually. This rule aims to provide retirees high confidence that they won't outlive their savings for 30 years.

Typically, FIRE followers withdraw 3% to 4% of their savings annually to cover living expenses in retirement. Detailed planning, economic discipline, and wise investment are key components in achieving a FIRE retirement.

$700k can last you for at least 25 years in retirement if your annual spending remains around $40,000, following the 4% rule. However, it will depend on how old you are when you retire and how much you plan to spend each month as a retiree.

The safe withdrawal rate method tries to prevent these worst-case scenarios from happening by instructing retirees to take out only a small percentage of their portfolio each year, typically 3% to 4%.

A 3 percent withdrawal rate would equal 33.3 years, while a 2 percent withdrawal rate would equal a portfolio that would last 50 years. So you can figure out your own safe withdrawal rate depending on how long you want your assets to last.

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 comes with a major caveat: It's not really a “rule” since everyone's situation is different. If you have a large retirement investment portfolio, you might not need to spend 4% of it every year. If you have limited savings, 4% might not come close to covering your needs.

You can retire a little early on $400,000, but it won't be easy. If you have the option of working and saving for a few more years, it will give you a significantly more comfortable retirement.

How long will $1 million last 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.

Putting that much aside could make it easier to live your preferred lifestyle when you retire, without having to worry about running short of money. However, not a huge percentage of retirees end up having that much money. In fact, statistically, around 10% of retirees have $1 million or more in savings.

“A common rule of thumb is to have at least 25 times your annual expenses saved. This is based on the 4% withdrawal rate, which is considered a safe rate to avoid depleting your retirement savings too quickly. For example, if your annual expenses are $50,000, you would need $1.25 million saved,” Kovar said.

Determine how much you need to retire early by 50

So, if your income is $75,000 and you plan to retire at 50, aiming for a fund of about $2.25 million could be necessary (the math: 75,000 * 30 = 2,250,000), assuming you'll need 100% of your pre-retirement income annually.

With 50 years of retirement, you have a 90% chance of success with a 4% withdrawal rate at most. A withdrawal rate of around 3.5% would be safer for most people. If you want real chances of success, you will need more than 50% of your portfolio allocated to stocks.

While the 4% rule can provide a helpful starting point for retirement planning, it's not a one-size-fits-all solution. Factors such as market fluctuations, medical expenses and personal tax rates must be considered when determining a safe withdrawal rate.

The 4% rule says people should withdraw 4% of their retirement funds in the first year after retiring and take that dollar amount, adjusted for inflation, every year after. The rule seeks to establish a steady and safe income stream that will meet a retiree's current and future financial needs.

With potentially 40 years of retirement ahead, a safe pre-tax initial withdrawal rate might range from 2.5% to 3.0%, depending on your risk tolerance and investment strategy.