Understanding the Basics: 4% Rule vs. RMDs
The 4% Rule: A Self-Imposed Guideline
The 4% rule is a long-standing guideline in retirement planning that originated from the research of financial planner William Bengen in the 1990s. The premise is simple yet powerful: you can withdraw 4% of your retirement portfolio annually, adjusted for inflation, without running out of money over a 30-year period. This rule is widely considered a “safe withdrawal rate” (SWR), offering a structured approach to manage your finances in retirement.
This rule is applicable across different asset types, including pre-tax accounts like 401(k)s, taxable brokerage accounts, and Roth IRAs. The key is to consider the entire portfolio when making these calculations, ensuring that you are treating your assets as a cohesive unit.
Example: Suppose you have a $1 million portfolio. According to the 4% rule, you could withdraw $40,000 in the first year of retirement. In subsequent years, you would adjust this amount for inflation, maintaining the purchasing power of your withdrawals.
RMDs: The Government’s Mandatory Requirement
Required Minimum Distributions (RMDs) are a different beast altogether. These are mandatory withdrawals from pre-tax retirement accounts, such as traditional IRAs and 401(k)s, imposed by the government to ensure that retirees eventually pay taxes on their tax-deferred savings.
The age at which RMDs begin has been a moving target. Currently (2025), it starts at age 73, but by 2033, this is set to increase to age 75. The exact amount you must withdraw is calculated based on your account balance and life expectancy, as determined by IRS tables.
Example: If you have $500,000 in a pre-tax account and you turn 73, the IRS might require you to withdraw approximately 4% (or $20,000) as your RMD for that year.
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Table Comparing the 4% Rule and RMDs:
Aspect 4% Rule RMDs Origin Self-imposed financial guideline Government-mandated tax requirement Application Entire portfolio Only pre-tax accounts Age Requirement None Starts at age 73 (75 by 2033) Calculation Basis Portfolio value IRS life expectancy tables Flexibility Adjustable by individual Fixed, mandatory -
Link to IRS Guidelines on RMDs: IRS RMD Guidelines