Suze Orman: Why the 4% Rule No Longer Works for Today's Retirees

"And if you're retiring with a respectable nest egg, it's important to know how to manage it. Many financial experts recommend using a strategy called the 4% rule. The rule has you withdrawing 4% of your savings balance your first year of retirement and adjusting future withdrawals for inflation. It's a strategy that, if all goes well, should be conducive to having your savings last for 30 years."

"The 4% rule makes a number of assumptions that could render it less effective. It assumes a fairly even mix of stocks and bonds and certain market conditions. Orman thinks markets are unpredictable, interest rates aren't what they were back when the 4% rule was established, and Americans are living longer. This combination makes the 4% rule a bit dangerous, in her opinion."

"Let's say you retire with $1 million in savings. With the 4% rule, you'd be looking at about $40,000 a year in income from your portfolio. With a 3% withdrawal rate, you'd be looking at $30,000 a year. Clearly, that's a huge difference, and one you may need to take steps to compensate for. One of the biggest fears you might have in the context of retirement is that your money will eventually run out. That's why it's important to withdraw from your savings carefully."

A common retirement guideline, the 4% rule instructs retirees to withdraw 4% of savings in the first year and then adjust withdrawals for inflation to aim for a 30-year portfolio life. The rule relies on assumptions about stock-bond allocation and historical market conditions. Market unpredictability, lower interest rates and increased longevity make a 4% starting withdrawal rate riskier. A safer initial withdrawal rate around 3% or lower may be appropriate depending on portfolio composition. Lower withdrawals significantly reduce annual income from a given nest egg. To address the gap, retirees should withdraw carefully and consider measures such as working longer.

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