4% or 8%, What's The Right Retirement Withdrawal Rule To Live By?

"When you spend your entire life working hard to save for retirement, the last thing you want to risk is your money running out on you. So to that end, it's important to manage your nest egg carefully once the time comes to begin taking withdrawals. Many financial experts will tell you that the 4% rule is your best option for managing your savings. But financial guru Dave Ramsey is a firm believer in the 8% rule."

"Ramsey's 8% rule allows you to enjoy an 8% withdrawal rate from your savings on an annual basis. It doesn't necessarily require inflation adjustments, because you're withdrawing a pretty substantial portion of your nest egg to begin with. Ramsey's 8% rule assumes that your retirement portfolio is mostly concentrated in stocks. A 50/50 stock-bond split will generally not produce strong enough returns to safely allow for an 8% withdrawal rate."

The 4% rule prescribes withdrawing 4% of a nest egg in the first retirement year and adjusting future withdrawals for inflation, assuming a 30-year horizon and a fairly even mix of stocks and bonds. Ramsey's 8% rule allows annual 8% withdrawals and may omit inflation adjustments because withdrawals start at a larger percentage of principal. The 8% approach assumes a portfolio concentrated in stocks; a 50/50 stock-bond split typically cannot support 8% safely. The appropriate withdrawal rate depends on portfolio composition, individual risk tolerance, and retirement income goals; conservative retirees usually favor 4%, while stock-heavy, risk-tolerant retirees might consider 8%.

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