Is the 4% Rule Actually More Like the 4.7% Rule?

Bill Bengen, creator of the 4% Rule, just released a new book with some fun news for all of us saving for retirement.

Bengen’s updated research shows that it’s safe to increase your withdrawal rate in retirement from 4% to 4.7%.

If you are retiring today, it gets even better. Bengen’s research shows that you can safely withdraw around 5.25%.

Bengen’s new book is called A Richer Retirement: Supercharging the 4% Rule to Spend More and Enjoy More.

If you’re at all interested in FIPE (Financial Independence Pivot Early), Bengen’s book is a must read.

What is the significance of raising the safe withdrawal rate from 4% to 4.7%?

If you are years away from retirement, you may be wondering, “Why does it matter if you withdraw 4% or 4.7% in retirement?”

There are two ways to answer that question.

Number 1: the higher the safe withdrawal rate, the more you can safely spend in retirement without running out of money.

That sounds fun.

You know what’s even more fun?

Number 2: the higher the safe withdrawal rate, the less money you need to save before you can retire.

That means you may be even closer to retirement than you previously thought.

That sounds like even more fun, right?

We’ll take a look at the math in a moment.

The title of Bengen’s book says it all: “spend more and enjoy more.”

Here at Think and Talk Money, enjoying our money is one of our primary objectives.

We are not interested in building the biggest bank accounts just so we look good on a spreadsheet. We are interested in building a life where we are in control.

That means spending money on what is important to us. It means spending more time with the people who are important to us.

So, how does a higher safe withdrawal rate help us?

Let’s explore that by first reviewing the 4% Rule

What is the 4% Rule?

The 4% Rule suggests that you can safely withdraw 4% of your investments in year one of retirement. Then, you can safely withdraw 4% plus an adjustment for inflation in subsequent years.

If you do so, you can expect your money to last for 30 years.

Without getting too technical, the 4% Rule is based off of research looking at historical investment gains, inflation, and other variables.

As an example, let’s say you have $1 million in your portfolio.

According to the 4% Rule, you can safely withdraw $40,000 in year one (4% of your portfolio), then 4% adjusted for inflation in each subsequent year, and not run out of money for 30 years.

Using the updated “4.7% Rule”, you can safely withdraw $47,000 in year one.

This simple example shows how you can take your current retirement savings and project the amount you can safely spend so your money lasts 30 years.

The 4% Rule also works in reverse. 

By that I mean you can use the 4% Rule to ballpark how much money you’ll need in retirement to maintain your current lifestyle.

We’ll look at exactly how to do that below.

In either case, the 4% Rule is an effective and easy way to start thinking about a magic retirement number.

How to use the 4% Rule based on your current savings.

We mentioned above that the 4% Rule works two ways. 

First, you can take your current retirement savings and calculate how much you can safely spend so your money lasts 30 years.

If you have $1 million invested, the 4% Rule says you can safely spend $40,000 annually and expect your money to last 30 years.

Here’s how the math works:

Current Savings x 4% (.04) = Annual Retirement Spending

$1,000,000 x .04 =$40,000.00

Using the 4.7% Rule, the math looks like this:

$1,000,000 x .047 =$47,000.00

That’s a useful calculation, especially if you’re nearing retirement age and just want to know how much you can spend each year.

But, what if you don’t exactly know when you want to retire? 

Your main priority may not be to retire by a certain age. Instead, your aim may be to retire with enough money to maintain your current lifestyle. You’re determined to continue working for as long as it takes.

To calculate that magic retirement number, you can once again use the 4% Rule. This time, in reverse.

How to use the 4% Rule based on your current spending habits.

The second way to use the 4% Rule is to start with your current spending habits to project how much money you’ll need to maintain that level of spending in retirement. 

This may seem obvious, but to do so, you’ll first need to know your current spending habits. 

If you don’t know how much you’re currently spending on a monthly basis, take a look at our budgeting series here.

The good news is that once you’ve created a Budget After Thinking, this next part is easy.

To calculate your magic retirement number based on current spending, simply follow these steps:

1. Add up the amount your’re spending each month in Now Money and Life Money.
2. Take that number and multiply it by 12 to see how much your lifestyle costs per year. 
3. Divide that yearly spending by .04

That’s your magic retirement number.

Current Spending / 4% (.04) = Magic Retirement Number

Now, let’s use some real numbers to help illustrate how to use the 4% Rule to project your magic retirement number.

Here’s how to use the 4% Rule to forecast your magic retirement number.

Let’s look at an example using the 4% Rule to forecast your magic retirement number.

Let’s say that you reviewed your Budget After Thinking and learned that you spend $6,000 per month in Now Money and $4,000 per month in Life Money. 

Combined, that means your lifestyle costs you $10,000 per month, or $120,000 per year.

To figure out how much you would need in investments to cover your current lifestyle for 30 years, divide $120,000 by .04.

Current Spending / 4% (.04) = Magic Retirement Number

Under the original 4% Rule, that means to maintain your current lifestyle of spending $120,000 per year for 30 years, you would need $3 million in investments.

In other words, your magic retirement number is $3 million.

If that number seems impossibly high to you, the updated 4.7% Rule should make you feel a little better:

Current Spending / 4.7% (.047) = Magic Retirement Number

$120,000 / .047 =$2,553,191.49

Based on the updated 4.7% Rule, you now only need $2.5 million instead of $3 million to maintain your current lifestyle in retirement.

That’s fun news.

Use the 4% Rule as an easy projection tool, not an actual withdrawal rate.

Whether you want to use the 4% Rule or the updated 4.7% Rule, keep in mind that these are projection tools.

I view the 4% Rule as a tool to ballpark your magic number, as opposed to a strict withdrawal rate once you actually retire. 

I point that out because there’s some debate in the personal finance community as to whether 4% is still a safe withdrawal rate in today’s economic environment. 

For our purposes, I’m not too concerned about that debate.

Once you get to retirement, your actual withdrawal rate may be higher or lower than 4% depending on a variety of factors. Put another way, you will need to adjust how much you withdraw each year based on factors outside your control.

Regardless, the 4% Rule is a great way to start thinking about how much you’ll need to save for retirement. Attaching an actual number to your retirement goals is extremely helpful.

Like Bengen argues in A Richer Retirement: Supercharging the 4% Rule to Spend More and Enjoy More, the point of saving money now is to spend it and enjoy it later.

For people who are used to saving aggressively during their working years, it can be hard to switch to a spending mindset.

Whether you’re nearing retirement or still have years to go, A Richer Retirement: Supercharging the 4% Rule to Spend More and Enjoy More will help you find that balance.

Have you read A Richer Retirement: Supercharging the 4% Rule to Spend More and Enjoy More? What did you think?

Will you update your retirement planning based on the new 4.7% Rule?

Let us know in the comments below.