Suze Orman Says Ditch the 4% Rule for Retirement Income: ‘It Doesn't Work Anymore'

The 4% rule has long been considered the gold standard for withdrawing money from your accounts in retirement. This guideline suggests drawing 4% of your retirement savings per year, adjusting for inflation, to keep a healthy enough nest egg to retire sustainably. But personal finance expert Suze Orman says times have changed and this rule no longer makes sense.

A financial advisor can help you determine an optimal withdrawal rate in retirement.

Citing the current financial environment and the increasingly volatile market, Orman spoke to SecureSave co-founder Devin Miller this spring during an interview for Moneywise.com regarding the traditional wisdom: “It doesn’t work anymore. I think it’s very dangerous."

Instead, Orman advises that the less money you withdraw each year, the "better off you are." She concludes: "Take the least amount possible out of retirement accounts."

Orman’s 4% Rule Alternative

The 4% rule was created in 1994 by financial planner Bill Bengen. Bengen found that a retiree could withdraw 4% of their money from a balanced portfolio (50% stocks, 50% bonds) in their first year of retirement and then adjust their withdrawals in subsequent years for inflation. Doing so, he posited, a retiree could all but guarantee that their money would last 30 years.

The popularity of the rule has increased and decreased over time, and even Bengen has revisited it. In 2020, he revised the rule to a 4.5% withdrawal limit.

Orman, however, argues that life, markets and the economy are so unpredictable that retirees and future retirees should adopt a scarcity mindset: Work longer, postpone Social Security until you can maximize your benefits at age 70 and spend as little as possible.

"Stop this ‘Oh, I’m going to retire at 60. I’m going to start claiming Social Security at 62,'" Orman said in the interview. If retirees must have a target for withdrawals, she says keep it to 3%.

Orman also emphasized the importance of holding liquid assets in an emergency savings account, advice that seems unsurprising since she co-founded SecureSave, an employer-based benefit designed to encourage individuals to build emergency savings.

"The place to start is with an emergency savings account, especially with your employer matching it, [so] that you can take care of the little things that totally put you out of sync with everything else," she said in the interview.

"Inflation makes everything far more expensive," Orman added. "It's not just the eggs or the chicken […] but your car insurance premiums, your home insurance premiums, property taxes, everything. You don’t have any money saved. You have nothing, and then something hits you - and what do you do? You put it on your credit card, you can’t pay it in full."

She concluded that Americans with no emergency savings have a ‘financial tornado’ coming their way.

‘Not the Best Guideline’

Many financial experts have weighed in over the years on the viability of the 4% rule for retirement withdrawals, including Rebecca Lake, a personal finance expert and SmartAsset contributor. When it comes to the 4% rule, she writes, "it may not be the best guideline for everyone."

"Figuring out how much you can reasonably afford to withdraw in retirement involves taking a look at the bigger picture," Lake writes.

Many financial advisors say retirement planning is often more dynamic and complicated than the simplistic 4% rule. After all, this rule of thumb doesn’t account for people's varying spending needs throughout retirement. Instead, retirement plans and withdrawal rates should be more flexible and able to meet a retiree’s evolving income needs, advisors say.

Bottom Line

While the 4% rule has been a standard for many years, it's important to look at your own specific situation, assets, and liabilities, as well as other factors like your health and expected lifespan. Examining all of these variables together may help you select a more appropriate withdrawal rate.

Retirement Planning Tips

• A financial advisor can help you plan for retirement. Finding a qualified financial advisor doesn't have to be hard. SmartAsset's free tool matches you with up to three financial advisors in your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you're ready to find an advisor, get started now.

• If you don't have access to a 401(k), consider opening an IRA or a Roth IRA as a way to save for retirement.

• Social Security plays a significant role in most people’s plans for retirement. SmartAsset’s Social Security calculator can help you estimate how much your benefits will be worth based on when you plan to claim them.

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