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A general rule of thumb for retirement is that you should withdraw 4% of your savings annually to last 25 to 30 years.

As small as a 4% annual decline sounds, with inflation at a 40-year high, it could be too much, experts say.

It also doesn’t take into account what market volatility can do to a retiree’s portfolio with any significant amount invested in the markets. Not to mention the possibility that retirement years, especially with medical advances that extend life expectancy, could last more than 30 years.

Financial planners now apply the 4% rule, and maybe retirees should too.

“It’s not meant to be a retirement plan,” David Lau, chief executive of DPL, told Financial Planning magazine. “It’s meant to be a guideline for part of the pension plan. Too many advisers and too many individuals who self-manage their pensions are using this as a retirement plan.”

Assuming a 4% annual withdrawal is safe is an oversimplification, says Lau.

Consider how the 4% rule, first developed by financial planner William Bengen in a 1994 academic paper based on historical data dating back to 1926, works. Say you have $1 million in retirement savings. The 4% deduction rule would have you withdraw $40,000 a year.

Under Bengen’s scenario, the investor would have a percentage of their savings in stocks, allowing their withdrawals to grow in line with inflation every year for 30 years.

In 1998, three professors at Trinity University in Texas confirmed Bengen’s theory, reinforcing the 4% reduction rule.

Fidelity recently released a study that increased that amount to 4.5%, and experts at a recent webinar hosted by DPL endorsed the 4% rule.

“Historically in the U.S., 4% has been that safe initial withdrawal rate,” said David Blanchette, head of retirement research at PGIM’s Prudential Financial investment advisory division. “We can take issue with many of the assumptions in the analysis, but it’s not a bad start for most retirees.”

Blanchett, however, hedged those remarks, saying 4% shouldn’t be a blanket rule of thumb recommended by all retirement advisers.

Blanchett also acknowledged the pain investors have felt over the past year, saying: “It’s really hard to put into words how horrible this year has been. If a client walks into your office, you can’t just say 4%.”

That’s why Christine Benz, co-author of the Morningstar 2021 research report, revised that withdrawal rate to 3.3% due to the expected low market returns, according to The Wall Street Journal.

Recently, however, Benz and his co-authors raised that withdrawal rate to 3.8% for retirees with a 30-year horizon. He said Morningstar researchers did this by looking at how many stocks and bonds were sold and poised for higher returns.

Morningstar’s updated thesis that a $1 million portfolio invested 50% in stocks and 50% in bonds would allow a retiree to withdraw $38,000 in 2023. If inflation moderates to 5% next year, the retiree could take home $39,900 in 2024.

Retirees who are optimistic about their life expectancy and who are risk averse may not want to take 4%, 3.8% or even less.

Frank O’Connor, vice president of research at the Insured Retirement Institute, an annuity advocate, casts a dose of skepticism on the 4% deduction rule;

“The research that led to the 4% rule is very specific in terms of asset allocation,” says O’Connor. “It’s not ‘whatever.’ So you can’t create an ultra-conservative portfolio that’s only 20% in stocks and be consistent with that original research.”

Another important factor to consider when weighing the 4% rule is inflation, which has historically been 2% per year and was not a factor in the original research. Increasing your withdrawals each year to keep up with inflation, currently at 7.1%, could undermine the basis of the 4% rule, O’Connor says.

“If your expectation is that you’re going to have to withdraw a lot more next year, and the next year, and the next year, you’re better off starting lower,” he says.

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