Within the vast topic of retirement, the concept of “the 4% rule” hits right at the core of most people’s concerns: how much money is enough money to have in your savings when you finally reach retirement?

There’s no shortage of advice about how much you should save for retirement, but there’s a lot less clarity around how much money you’ll ultimately need when the time comes. This is what the 4% rule addresses.

What is the 4% rule?

The 4% rule is a popular retirement withdrawal strategy that suggests retirees can safely withdraw the amount equal to 4 percent of their savings during the year they retire and then adjust for inflation each subsequent year for 30 years.

The 4% rule is a simple rule of thumb as opposed to a hard and fast rule for retirement income. Many factors influence the safe withdrawal rate such as risk tolerance, tax rates, the tax status of your portfolio (i.e., the ratio of tax-deferred assets to taxable assets to tax-free assets) and inflation, among others.

The upside to this go-to rule is its simplicity. Having a guideline for retirement spending that’s this clean and simple makes planning much easier. The downsides are that it’s a number that might become outdated by the time you reach retirement, and that any flat number doesn’t adjust for market conditions, which surely will change year to year.

Let’s dig into the 4% rule a bit more — and unpack whether or not it might be a helpful guiding rule for your own retirement planning or whether it’s ill-equipped for the dynamic set of factors that rule over long-term savings and future spending.

History of the 4% rule

In 1994, using historical data on stock and bond returns over a 50-year period — 1926 to 1976 — financial advisor William Bengen challenged the previous go-to thinking that withdrawing 5 percent yearly in retirement was a safe bet.

Based on a deep dive into the half century of market data, Bergen concluded that essentially any conceivable economic scenario (even the more tumultuous ones) would allow for a 4 percent withdrawal during the year they retire and then they’d adjust for inflation each subsequent year for 30 years.

Bengen used a 60/40 portfolio model (60 percent equities, 40 percent bonds) and was conducted during a period of higher bond returns (higher interest rates) compared with current rates.

What the 4% rule doesn’t account for

Not to dismiss the diligent work of William Bengen and the financial community that supported his conclusion, but, as with all pieces of conventional wisdom, the 4% rule doesn’t account for countless variations in each person’s individual situation. This is not so much the result of a failing in the rule itself, or the math that backs it up, but an inherent failing of attaching any firm, flat rule to governing long-term financial planning, given that the economic landscape over the long term is anything but flat and firm.

Here are a few factors that opting for a set-it-and-forget-it 4% flat withdrawal rate in retirement doesn’t include:

  • Medical expenses: Most of us will encounter them as we get older, especially in the golden years of retirement, but exactly what kind of medical expenses you’ll incur ourselves is practically impossible to predict. Some are also exponentially more costly than others. The other big variable that impacts the viability of the 4% rule: life expectancy. Needless to say, the longer you live, the longer you’ll need your savings to last.
  • Market fluctuations: The economy is unlikely to stay perfectly consistent and even-keeled for the entirety of your retirement years. In a booming economic environment, withdrawing more than 4% annually might be perfectly fine; in more uncertain times, you might need to pull back your spending a bit. Unfortunately, there’s no prescriptive, guiding rule for financial management that beats simply keeping an eye on your money and acting accordingly at any given time.
  • Personal tax rate: A big factor is your personal tax rate, which is affected by a number of factors including the types of investment accounts you have, the size of those accounts and your other income, deductions, credits and what state you live in.

Should you use the 4% rule?

So do these personal — and in some cases, wholly unknowable — details of our financial futures render the 4% rule useless? Not at all. It just needs to be adapted for personal use.

And that’s really the point, both of the 4% rule and any other financial rules of thumb: It’s less of a hard-and-fast mandate on what to do and more of a well-informed starting place, from which your own personal retirement savings and spending plan can be thoughtfully crafted. It doesn’t solve everything you need to consider about retirement finances, but many people consider it a very useful frame of reference to jump off from.

That said, the applicability of the 4% rule also depends on where your retirement assets are invested. If you’re primarily saving for retirement somewhere other than a portfolio of mostly stocks and bonds, then the 4% rule is less likely to apply to your holdings. And even then, depending on the allocation between stocks and bonds, 4 percent might not be the right figure for your portfolio. Or it might be fitting today, but not 20 or 30 years from now. In any case, it’s between you and your financial advisor to figure out what projected withdrawal rate makes the most sense.