Four Percent Rule

AAA

DEFINITION of 'Four Percent Rule'

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to provide a steady stream of funds to the retiree, while also keeping an account balance that will allow funds to be withdrawn for a number of years.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.

INVESTOPEDIA EXPLAINS '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. Required Minimum Distribution Method

    One of three methods by which early retirees of any age can access ...
  2. Withdrawal Plan

    1) A payment structure arranged with a mutual fund in which the ...
  3. Sequence Risk

    The risk of receiving lower or negative returns early in a period ...
  4. Systematic Withdrawal Plan - SWP

    A service offered by a mutual fund that provides a specific payout ...
  5. Accumulation Phase

    1. A period of time when an annuity investor is in the early ...
  6. Self Invested Personal Pension ...

    A tax-efficient retirement savings account available in Great ...
RELATED FAQS
  1. How should I invest the money I keep on my IRA?

    For individuals who are just starting to save, certificates of deposit can be a good place to start, but the interest rates ... Read Full Answer >>
  2. Why choosing the right investment adviser is crucial for your portfolio's health

    Just as finding a good mechanic will help keep your car running smoothly, finding a good broker or financial advisor can ... Read Full Answer >>
  3. What documents I need to transfer an IRA/SEP/SIMPLE to a Traditional IRA?

    Most firms require that you complete their account transfer request form, which they use to request the transfer of assets ... Read Full Answer >>
  4. Is there a limit on how much I can move from my IRA to my Roth IRA?

    There is no limit on the amount that can be converted from your Traditional IRA to your Roth IRA. To learn more, read Retirement ... Read Full Answer >>
  5. What does U.S. law say about contingent beneficiaries?

    In the United States, posthumous asset transfers only require the listing of a primary beneficiary. Contingent beneficiaries ... Read Full Answer >>
  6. Places where I can open an IRA Account?

    An individual retirement account can be opened through a range of major financial institutions, including brokerage firms ... Read Full Answer >>
Related Articles
  1. Budgeting

    Managing Income During Retirement

    Learn some sensible strategies for making your hard-earned savings last for as long as you need them.
  2. Options & Futures

    Strategies For Withdrawing Retirement Income

    You've accumulated the wealth you need to retire, but how will you distribute it? We'll lay out some options.
  3. Entrepreneurship

    Will A Systematic Withdrawal Plan Work For You?

    Check out the particulars of an SWP to see if it's the right choice for your retirement.
  4. Retirement

    Retiring On Investment Interest: Can It Be Done?

    Spending investment interest in retirement can be a viable strategy, but it won't work for everyone.
  5. Options & Futures

    Retirement Planning Basics

    Realizing your post-work goals need not be daunting. We'll tell you everything you need to know to get - and stay - on track.
  6. Personal Finance

    Should You Track The Cost Of Retirement Income?

    Today, workers face a challenge when saving for retirement, because retirement income is getting more expensive, and the savings are not keeping up.
  7. Retirement

    Facing Retirement? Look Beyond 100% Bonds

    Retiring doesn't mean putting all your money in bonds. There are two things to consider when it comes to be invested in bonds: growth and inflation.
  8. Professionals

    How to Prep Your Portfolio for Down Markets

    Down markets are a reality that can kneecap your retirement withdrawal plans. Minimize the pain with these strategies.
  9. Professionals

    Real Estate Advice for Recent Retirees

    What retirees need to consider when it come to making real estate decisions.
  10. Retirement

    Top 3 Retirement Cities In Arizona

    The desert lifestyle is only one of the attractions of these Arizona cities. The cost of living isn't so bad, either.

You May Also Like

Hot Definitions
  1. Fisher Effect

    An economic theory proposed by economist Irving Fisher that describes the relationship between inflation and both real and ...
  2. Fiduciary

    1. A person legally appointed and authorized to hold assets in trust for another person. The fiduciary manages the assets ...
  3. Expected Return

    The amount one would anticipate receiving on an investment that has various known or expected rates of return. For example, ...
  4. Carrying Value

    An accounting measure of value, where the value of an asset or a company is based on the figures in the company's balance ...
  5. Capital Account

    A national account that shows the net change in asset ownership for a nation. The capital account is the net result of public ...
  6. Brand Equity

    The value premium that a company realizes from a product with a recognizable name as compared to its generic equivalent. ...
Trading Center