what is the 4 rule 
the 4 rule for retirement budgeting suggests that a retiree withdraw 4 of the balance in their retirement account s in the first year after retiring and then withdraw the same dollar amount adjusted for inflation every year thereafter the 4 rule is intended to supply a steady stream of income while maintaining an adequate account balance for future years assuming a reasonable rate of return on investment the withdrawals will consist primarily of interest and dividends experts disagree on whether the 4 rule is the best option many including the creator of the rule say that 5 is a better rule for all but the worst case scenario others caution that 3 is safer understanding the 4 rulethe 4 rule is a guideline used by some financial planners and retirees to estimate a comfortable but safe income for retirement an individual s life expectancy plays an important role in determining whether the rate will be sustainable retirees who live longer need their portfolios to last longer and their medical costs and other expenses can increase with age history of the 4 rulethe concept of the 4 rule is attributed to bill bengen a financial adviser in southern california who created it in the mid 1990s some people say that the rule has been over simplified because he actually said that the 4 rule was based on a worst case scenario and that 5 would be a more realistic number 1the rule was created using historical data on stock and bond returns over the 50 year period from 1926 to 1976 focusing heavily on the severe market downturns of the 1930s and early 1970s bengen concluded that even during untenable markets no historical case existed in which a 4 annual withdrawal rate exhausted a retirement portfolio in fewer than 33 years 2accounting for inflationwhile some retirees who adhere to the 4 rule keep their withdrawal rate constant the rule allows retirees to increase the rate to keep pace with inflation possible ways to adjust for inflation include setting a flat annual increase of 2 per year which is the federal reserve s target inflation rate or adjusting withdrawals based on actual inflation rates the former method provides steady and predictable increases while the latter method more effectively matches income to cost of living changes while the 4 rule recommends maintaining a balanced portfolio of 50 common stocks and 50 intermediate term treasury bonds some financial experts say that you should maintain a different allocation such as reducing exposure to stocks in retirement in favor of a mix of cash bonds and stocks advantages and disadvantages of the 4 rulewhile following the 4 rule can make it more likely that your retirement savings will last the remainder of your life it doesn t guarantee it the rule is based on the past performance of the markets so it doesn t necessarily predict the future what was considered a safe investment strategy in the past may not be a safe investment strategy in the future if market conditions change there are several scenarios in which the 4 rule might not work for a retiree a severe or protracted market downturn can erode the value of a high risk investment vehicle much faster than it can a typical retirement portfolio furthermore the 4 rule does not work unless a retiree remains loyal to it year in and year out violating the rule one year to splurge on a major purchase can have severe consequences down the road as this reduces the principal which directly impacts the compound interest that you will depend on for sustainability however there are obvious benefits to the 4 rule it is simple to follow and provides for a predictable steady income and if it is successful the 4 rule will protect you from running short of funds in retirement it s simple to followprovides predictable steady incomeprotects you from running out of money in retirementrequires strict adherence doesn t respond to lifestyle changes 