4% RULE
Retirement isn’t for dummies. You still have to PLAN and do MATH.
If you have planned: You have SOME invested in an IRA or 401(k). If you don’t have $1.5 million there don’t feel bad. You have lots of company. The median retired couple has less than $125k invested. So, if you have $250k or more, and you plan well, you should have no worries. If you have between $125k and $250k you will need to do serious planning. A new car can harm both your budget and hopes for that European vacation. Below $125k and you will need to do some deep soul searching, learn to live below what you desire, and keep a strong reign on ALL spending (maybe you don’t have to resort to cat food).
Let’s start with retirement INCOMES.
You will have SOME Social Security income. The average retired couple (because the SSA doesn’t track “median” SS income) receives about $45k Social Security income (for now). $45k is almost impossible to live on. You certainly won’t be able to update the kitchen. Hopefully you have a few other options: like other government income from military service, pension, part-time employment, or a small business providing a few shekels per month (Selling flowers, small engine repair, blade sharpening, etc.) Every $12 of income is a dollar less you’ll have to take from savings per month. Add up all your “incomes.” If there isn’t enough income, maybe you should go back to work for a few years if you’re healthy.
Second, evaluate EXPENSES.
Oh, my! Why do you still belong to that “book club” when, being retired, you have time to visit the public library any time you want? Two columns: Necessary and Dispensable. Housing, Utilities, and Groceries are Necessary. Wine/Beer/Caviar/Restaurant Meals – Dispensable. The Necessary items are in your budget automatically. The Dispensable will only be there if your INCOME allows. (Avoid taking money out of savings for Dispensable items.)
Third, Required Minimum Distributions (RMDs).
After you’ve tracked incomes and expenses you will know how much you will need to take from savings. The government requires that RMDs be withdrawn, but they don’t require that you spend it all. You need to decide two things: 1) a retirement withdrawal strategy and 2) a spending strategy. Understand that the formula for RMD withdrawals is based solely on the government’s determination of how long those your age and sex are likely to live. You may live much longer. So, if you spend it as you withdraw it you may come up short in your 80s. Then what? In many cases those who spend their RMDs, find they have to sell the house and move to a small townhouse or apartment in later life. Will you climb stairs well at age 86? Enjoy your life while you can AND prepare for the unknown future.
Some just stick with the 4% strategy (but your RMD may require you take more). The 4% thingy isn’t awful, especially if you invest half of it into a non-IRA account as you receive it (the first year), then adjust for inflation each year (year 2 you spend 52% of your withdrawal, year 3 you spend 54% of it, year 6 spend 60%, etc). By the time inflation has caught up with your withdrawals you can begin drawing from the investments you have made with the excess RMDs to stretch your budget.
Because my wife and I have other outside incomes (things like pensions and business income), we are determined to leave our investments in place as long as possible. If Social Security benefits get whacked I guess that will cease to be effective. Yet here is what we are planning for that contingency: We are investing more in several funds that concentrate on high dividends. If we need, we will supplement our budget with that dividend income, leaving our core investments in place longer.
Whatever strategy you select, you must withdraw enough money from tax-advantaged investment accounts — such as your SEP, SIMPLE, traditional IRA, or 401(k) — to meet the IRS rules for required minimum distributions (RMDs).
RMD rules mandate you withdraw a certain portion of your investment account balance each year after you reach age 73 (you can start as early as 59 ½ ). If you don’t, you’re subject to a 25% tax penalty on the amount you failed to withdraw. As of 2024, RMDs aren’t required for Roth accounts. If you have several 401(k) accounts you have to account for every penny invested. We combined a few to simplify that.
I have a beef with the Social Security Administration: They claim that your SS benefits will equal 40% of your working income. The beef is – that 40% figure is based on the AVERAGE income of $66,600. However, the MEDIAN salary is only $62,000. That means that for HALF of retirees Social Security benefits could equal 43% or more of their working salary. That’s a difference of over $1,800 ($153 more every month than the SSA claims they will receive). Look at your income pre-retirement and multiply by 43% rather than 40% if your income is lower than $63k. Over $70k you should multiply by less than 40% to see the amount you will receive. Here’s the truth: Social Security benefits are based on a sliding scale; lower wage earners receive a much higher percentage of their wages than high wage earners. Sign up for a SSA account and review YOUR data. Don’t waste your time on “averages” to determine your budget. Get true data in the 5 years prior to retirement. Plan from facts, not averages.
Take Social Security when it is BEST for you. Nearly 40% of those who took it at age 62 regretted that decision. If you are healthy and have a job, maybe wait until 62 ½ or later to quit and claim your benefits. You will receive checks with 4% or more cash in them (that could be $70 more per month for the rest of your life). I’ve said it before, there is a sweet spot when signing up. If you are healthy and can wait until age 64 to 66, longevity probabilities work in your favor. If you feel lucky, wait until 70, but if there is a spouse who may later depend on YOUR Social Security (spousal benefits) he or she will only get the value of your Full Retirement Age (FRA) benefit amount (waiting until 70 gains nothing for your spouse).
[By the way, if you live exactly as long as the SSA plans for you to live, it doesn’t matter when you take the benefits (you will receive the same number of total dollars). If you live longer or shorter it matters a lot.]
Copyright 2025 Donald Whelpley
[PLEASE NOTE that Don is always open to discussing the thoughts and opinions he shares here and welcomes comments as shared in the comment section. He doesn’t use other social media platforms and won’t see whatever you’d like to share with him if you post it elsewhere.
ALSO, Don is always open to offer his thoughts on various topics. If you have a specific request, you can let him know in a comment; he reads – and replies to – them all. ~ Sherry]
See more GUEST POSTS from Don!
Just read an article by the creator of the 4% rule. He “claims” people live a lot longer now than when he created the rule (not true, lifespans have increased by mere months). He also claims that investment incomes are better now than when he created the rule (also not true, the stock market has been a steady provider of solid growth for over 100 years).
I’m not so sure I’d put my full confidence in the 4% rule for retirement withdrawals. I suggest you do your own math.
As someone who is still far from retirement, I think an important part of retirement is having a good community. Church, family, close friends. I have personally seen retirees go through hundreds of thousands of dollars paying for assisted living, nursing, or long-term medical complexities.
It runs counter to the independence ingrained in American culture, but I expect my children to take care of me when I am old, just as my siblings and I take care of our parents, and they took care of theirs.
To be clear, I am not saying don’t save for retirement. Definitely do that, but I believe that there is also a family obligation to care for our parents and a church family obligation to care for the widows among us.
Apart from due planning, I must trust that God will provide, my 401k can disappear in a market crash, my family could get sick, my church could fall apart, my country could get ravaged by war, etc. There is only One that I can truly count on to provide.
@Wulfhart
Thanks for your comments.
I agree, by the way.
The whole process MUST be researched. I am no longer amazed by how many have neither made plans nor researched the laws for their state. (Example, in our state you will need to cash out your whole life policy, but not a term-life policy, before Medicaid will pay anything. This is something you should know.) See an elder lawyer by age 55.
Learning is continual for retirees. There’s way too much to know and few places to find good info. I have read hundreds of pages at SocialSecurity.gov and still missed THIS:
If your spouse (who has the larger SS payment) dies, you should immediately apply for Spousal Benefits. Immediately!!! Why? Because they won’t give you back pay. They pay the benefits from the point of application ONLY.
You are probably down one month even if you apply on the date of death. Sad that you can’t take time to grieve when it comes to the Federal government. This is probably true for other benefits as well, like pensions, veteran’s benefits, etc. You should have a list and contact info for each in your emergency file.