Retirement Spending 2024: Is the 4% Rule Still the Best Guide?

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Like many financial rules, the 4% retirement rule goes in and out of fashion depending on the broader economic environment. According to that rule, you should spend no more than 4% of your investments during the first year of retirement and then adjust the total every subsequent year to account for inflation. But it shouldn’t be set in stone.

As previously reported by GOBankingRates, even Bill Bengen, who devisised the 4% rule in 1994, has changed his views on it through the years. In 2006, he started recommending spending no more than 4.7% of your investments during your first year of retirement. In 2022, he scaled that back to around 4.4% due to that year’s soaring inflation rate.

This year, some financial planners are re-evaluating the 4% rule again, CNBC reported. One of the main reasons for this is that future Social Security payments could move lower due to the looming depletion of the program’s Old Age and Survivors Insurance (OASI) Trust Fund. That fund is expected to run out of money in about a decade. When it does, some retirees could face a cut of more than $17,000 a year, according to one estimate.

With the possibility of lower Social Security checks, retirees will need to make their retirement savings last longer. One result is that many financial planners now recommending changing the 4% rule to 3.3%

“Because the 4% rule is so popular, it has been challenged for decades because it’s such a widely used measure that people want to make sure it’s still accurate and relevant,” Scott Meyer, a wealth manager and partner at Merit Financial Advisors, told CNBC. “The argument for why that number should be higher or lower depends on the environment you’re in, the environment of the future market and the future economy. How long we live also has a big impact on how much we’ll need. As a result, there are arguments that we should be withdrawing less each year because we’re living longer and will need more money.”

In fact, the 3.3% rule has been on the radar of financial planners for a couple of years. In 2021 Morningstar recommended starting retirement by spending 3.3% of savings, The Wall Street Journal reported. That turned out to be pretty sound advice because of the high inflation to come. A year later the “safe withdrawal rate” climbed to 3.8%.

“It is relatively good news,” John Rekenthaler, Morningstar’s Director of Research, told the Journal in an interview late last year. “Stock and bond valuations are lower and there is more cushion for investors.”

While some financial experts say the 4% rule does not apply today, others suggest that 2024 might be a good time to return to it — under certain conditions. These include the potential for both higher bond yields and lower long-term inflation.

As The Wall Street Journal reported, the standard 4% recommendation is for a portfolio with 20% to 40% in stocks and the rest in bonds and cash. With smaller stock allocations than that, the returns might not be enough to fund a 30-year retirement. If you can delay retirement long enough so you only need 20 years of retirement income, you can use an initial spending rate of 5.4%.

Keep in mind that the 4% rule and its variations only deal with how you should spend money in retirement — not save for it. For the latter, you it’s helpful to have an idea of how much money you’re going to spend in retirement and work backwards from there.

Here are some retirement expenses to consider:

• Rent or mortgage;
• Healthcare and long-term care costs;
• Annual cost of groceries;
• Annual cost of medication;
• Transportation costs (whether that’s car payments and maintenance or public transportation expenses);
• Amount you plan to spend on travel each year;
• Pet expenses.

“There is a quote that says you should ‘begin with the end in mind,'” Meyer told CNBC. “So you should determine how much you’re going to need to spend each year in retirement and use that 4% rule of thumb to figure out how much money you’ll need to last you throughout retirement.”

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