This general guidance may no longer work.
IRS increases 401(k) contribution limits for 2026
The IRS will increase 401(k) and catch-up contribution limits for 2026, allowing workers to save up to $32,500 for retirement.
When you make sacrifices to build your retirement savings, you want that money to last. That’s why it’s important to carefully manage withdrawals from your IRA or 401(k).
For decades, financial planners have relied on a common rule of thumb for managing retirement nest eggs: the 4% rule. The 4% rule involves withdrawing 4% of your savings in the first year of retirement and adjusting subsequent withdrawals for inflation.
For example, let’s say you retire with a $1 million IRA. Using the 4% rule, you would withdraw $40,000 in your first year of retirement. You will then increase your withdrawals as needed to accommodate rising costs of living. If you follow that guideline, your nest egg will likely last for 30 years.
On paper, the 4% rule sounds like a good plan. In reality, this may not be the case.
Calculations may change as returns decline
One of the biggest challenges to the 4% rule is the changing interest rate environment. Current bond yields as well as future bond yields may not be sufficient to sustain a 4% withdrawal rate on an ongoing basis.
The 4% rule also assumes a fairly even mix of stocks and bonds in your retirement portfolio. An overly conservative asset mix can lead to lower returns that cannot support a 4% withdrawal rate.
On the other hand, a stock-heavy portfolio may allow for larger withdrawals and improve your quality of life in retirement. by only Withdrawing 4% may limit yourself.
A series of return risks could lead to breaking the rules early.
Another problem with the 4% rule has to do with the set of return risks. If the market takes a downturn early on, when retirement withdrawals are just beginning, sticking to a 4% interest rate could put your portfolio at risk of premature depletion.
Of course, this risk does not only exist at the beginning of retirement. It’s an ongoing risk. However, if you sell assets at a loss to generate retirement income, it will be difficult for your portfolio to recover. If that happens early on, you run the risk of depleting your savings.
Expenses are not always flat
The 4% rule assumes that your expenses are the same each year, excluding inflation. But your spending patterns can be very different in the early years of retirement than they are later on.
Let’s say you retire at age 65. While your health is strong, you may decide to travel frequently for the next five years. However, once you reach your 70s, you may decide to slow down and spend significantly less.
Following the 4% rule can keep your withdrawal rate low early in retirement, even though you can afford to take large distributions knowing that they will go down later. It could mean missing out on a big experience.
Longevity is also a risk factor
The 4% rule was designed around a 30-year period. However, these days people are generally living longer. When you combine this with early retirement, the 4% rule becomes even more risky.
You can also take a more flexible approach
All in all, the 4% rule isn’t a bad starting point for managing your retirement accounts. But rather than locking yourself into a single rule, it may be wiser to take a more flexible approach to managing your nest egg.
That may mean adjusting spending upwards in the early stages of retirement to maximize health outcomes. It could also mean spending more when the market is strong and spending less when the market is turbulent.
Also, consider different sources of income. If you have Social Security, a pension, and part-time income, you may not need to tap your portfolio as much as 4% each year.
Overall, the 4% rule is easy to understand and provides a useful starting point for managing your retirement nest egg. But that doesn’t mean it’s right for everyone. And it may not be optimal for you.
Treat the 4% rule as a starting point for managing your savings. From there, we make tweaks based on changing needs and market conditions.
The actual ideal withdrawal rate may be 4%, but this is not always the case. And it’s okay to have a strategy that allows you to do that.
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