Forget the 4% Rule. With the Right Portfolio, You Can Do Better

Saving for retirement is not an easy thing. It requires you to manage your paycheck carefully and, at times, say no to things you want so you can prioritize IRA or 401(k) contributions.

But once you build up a retirement nest egg, it’s important to do what you can to make sure that money lasts as long as it needs to. And a big part of that is having the right investment mix and withdrawal strategy.

For decades, the 4% rule has been the gold standard among many financial professionals for managing a retirement portfolio. It says that if you withdraw 4% of your portfolio in your first year of retirement and adjust subsequent withdrawals to account for inflation, your money should last 30 years — even if market volatility ensues during that period.

But while the 4% rule may be a good benchmark to work with, it could also leave you short on income. With the right approach, though, you may be able to get more than 4% out of your retirement portfolio each year.

It’s okay to aim higher

A 4% withdrawal rate might seem like a good starting point for your portfolio. But unless you have a lot of money, it may not give you the annual income you’re after.

Let’s say you have $1 million saved, which is arguably a decent sum of money. The 4% rule only allows you to withdraw $40,000 a year.

Granted, most people with that much retirement savings probably worked for it and therefore qualify for Social Security. The average monthly benefit today is a little over $2,000. But if you’re someone who was able to save $1 million, you may have been a higher earner who’s therefore entitled to larger monthly checks during retirement.

But either way, if you want more money out of your portfolio than what the 4% rule allows for, there’s a way to get it. You just need to invest in assets that can sustain a higher rate of growth and set up some guardrails to protect yourself against market volatility.

The 4% rule assumes that your portfolio will have a fairly equal mix of stocks and bonds. A more stock-heavy portfolio could produce enough gains annually to allow for, say, a 6% withdrawal rate. In our example of $1 million in savings, that would give you $60,000 a year instead of $40,000.

But if you’re going to load up on stocks and accept the volatility that comes with doing so, you’ll need protection from market turbulence. So in addition to investing aggressively, you’ll want to keep at least two years’ worth of living expenses in cash. That way, if there’s a prolonged market downturn, you won’t have to tap your portfolio and lock in losses during that time.

Think about your retirement income needs

The 4% rule may work for a lot of retirees, but it’s not guaranteed to work for you. You may want more income each year out of your portfolio. And after working hard to save that money, it’s something you deserve.

With the right investment mix, you can set yourself up to withdraw more than 4% of your retirement portfolio each year. Just make sure to have a backup plan in case the market crashes — which, over the course of a decades-long retirement, is something that’s likely to happen more than once.