Four Percent Rule

What is the 'Four Percent Rule'

The four percent rule is a rule of thumb used to determine the amount of funds to withdraw from a retirement account each year. The four percent rule seeks to provide a steady stream of funds to the retiree, while also keeping an account balance that will allow funds to be withdrawn for a number of years. The 4% rate is considered to be a "safe" rate, with the withdrawals consisting primarily of interest and dividends. The withdraw rate is kept constant, though it can be increased to keep pace with inflation.

BREAKING DOWN 'Four Percent Rule'

The four percent rule helps financial planners and retirees set a portfolio's withdrawal rate. Life expectancy plays and important role in determining if this rate is going to be sustainable, as retirees who live longer will need their portfolios to last a longer period of time and medical costs and other expenses can increase as the retiree ages.

RELATED TERMS
  1. Possibility Of Failure (POF) Rates

    The likelihood that a retiree will run out of money prematurely ...
  2. Required Minimum Distribution Method

    One of three methods by which early retirees of any age can access ...
  3. Sequence Risk

    The risk of receiving lower or negative returns early in a period ...
  4. Safe Withdrawal Rate (SWR) Method

    A method to determine how much retirees can withdraw from their ...
  5. Fixed Annuitization Method

    One of three methods by which early retirees of any age can access ...
  6. Dynamic Updating

    A method of determining how much to withdraw from retirement ...
Related Articles
  1. Retirement

    Why The 4% Rule No Longer Works For Retirees

    The 4% rule basically states that retirees can withdraw that much from their portfolio each year without depleting the principal too early.
  2. Retirement

    4 Mistakes to Avoid with Your Retirement Plan

    The retirement landscape is changing. Here are four things retirees today need to be wary — and aware — of when it comes to their investments.
  3. ETFs & Mutual Funds

    How To Choose A Retirement Income Fund

    Retirees looking for income can choose retirement income funds. But in order to pick the right one, you have to look at investments and fees.
  4. Retirement

    How Much Should Retirees Withdraw From Accounts?

    It can be difficult to determine how much money you can withdraw from your retirement savings each year without depleting your accounts.
  5. Retirement

    3 Safer Income-Oriented Asset Classes for Retirees in 2016

    Learn why the chase for safe retirement income will continue in 2016 with market yields remaining low, even with the Fed's first tightening move in many years.
  6. Financial Advisor

    Investing Tips for Those Nearing Retirement

    Here are some saving and investing tips for people who are close to retirement.
  7. Retirement

    This Is How Retirees Live On $1 Million Dollars

    Learn how retirees use various strategies, including immediate annuities and traditional portfolio investing, to make $1 million last throughout retirement.
  8. Retirement

    6 Ways Retirees Can Capitalize on Higher Rates

    A interest rate increase still looks to be on the horizon, so retirees should begin rethinking the way they currently invest.
  9. Investing

    How Retirees Should Think About Investing

    Older households are still rebuilding their assets in a post-recession environment. Learn how to think about the task during the conserving stage of life.
  10. Retirement

    Top 5 Retirement Mistakes and How to Avoid Them

    Retirement planning becomes extra important in the final stretch, with many common mistakes becoming very costly. Here are some tips to avoid any problems.
RELATED FAQS
  1. What does a sample plan using the 4% retirement rule look like?

    Discover how the 4% retirement rule can work as part of a plan to achieve increasing retirement income if investments perform ... Read Answer >>
  2. How do you withdraw money from your 401(k)?

    Deciding to take a withdraw from your 401k is not a decision that should be made lightly. However, for those who needs funds, ... Read Answer >>
  3. When can benefits be received from a provident fund?

    Find out when participants in provident funds can begin receiving benefits, including how funds can be used to finance important ... Read Answer >>
  4. What is the difference between the rule of 70 and the rule of 72?

    Find out more about the rule of 70 and the rule of 72, what the two rules measure and the main difference between them. Read Answer >>
  5. When can I withdraw my IRA money?

    Managing an individual retirement account can be tricky. Find out when you can withdraw IRA money without incurring a 10 ... Read Answer >>
  6. Can you make tax-free withdrawals from your 401(k)?

    Find out whether you can take withdrawals from your 401(k) tax-free, including how withdrawals from Roth and traditional ... Read Answer >>
Hot Definitions
  1. European Union - EU

    A group of European countries that participates in the world economy as one economic unit and operates under one official ...
  2. Sell-Off

    The rapid selling of securities, such as stocks, bonds and commodities. The increase in supply leads to a decline in the ...
  3. Brazil, Russia, India And China - BRIC

    An acronym for the economies of Brazil, Russia, India and China combined. It has been speculated that by 2050 these four ...
  4. Brexit

    The Brexit, an abbreviation of "British exit" that mirrors the term Grexit, refers to the possibility of Britain's withdrawal ...
  5. Underweight

    1. A situation where a portfolio does not hold a sufficient amount of a particular security when compared to the security's ...
  6. Russell 3000 Index

    A market capitalization weighted equity index maintained by the Russell Investment Group that seeks to be a benchmark of ...
Trading Center