What Is the Reverse 4 Percent Rule?

Bill Nelson is a planning excellence lead consultant at Northwestern Mutual. 

There are several retirement savings guidelines online, but few are as well known as the 4 percent rule. It’s meant to provide a rough idea of how much you can withdraw from your nest egg during each year of retirement. The main limitation, of course, is that every retiree is different and has their own goals for their future.  

The rule also operates under the assumption that your portfolio is split evenly between stocks and bonds. This was a reasonable assumption in the1990s when William Bengen created the rule, but it may not be as common today. 

The reverse 4 percent rule is an alternative way to plan for retirement. Here’s how it works.

What's the difference between the 4 percent rule and the reverse 4 percent rule?

The 4 percent rule focuses on how much you can withdraw in retirement so that you don’t run out of money before you pass away. This is for the spending or “decumulation” phase of retirement. 

The other rule, reverse 4 percent, is a general guideline for how much to save and invest as you’re looking ahead toward retirement. This is sometimes called the “accumulation” phase. Financial rules of thumb aren’t perfect, but they can be helpful to get a quick number.

The 4 percent rule

The 4 percent rule is a guideline for how much to spend in retirement. It assumes you’ve adequately saved for retirement and suggests withdrawing 4 percent from the total value of your retirement savings during the first year. You continue withdrawing the same 4 percent every year while tacking on a little extra to account for inflation. With this math and certain assumptions, your nest egg should last for at least 30 years. 

Let’s say you have worked hard and saved $1.5 million for retirement. With the 4 percent rule, you’d withdraw $60,000 during the first year you’re retired (0.04 x 1,500,000). If inflation is 3 percent the following year, you’d withdraw $61,800 (60,000 x 1.03).

The reverse 4 percent rule

The reverse 4 percent rule is based on your expected annual expenses in retirement. You divide this amount by 4 percent to estimate how much money you’ll need during retirement from your investments. It helps you figure out how much you should put into them while you’re working. For example, let’s say your total spending need in retirement is expected to be $100K per year. You’ll get $60K from a pension and Social Security, so your expected annual expense need is about $40K. That should cover the gap between what your pension and Social Security provide compared with the total you need. 

The reverse 4 percent rule would tell you to save $1,000,000 for retirement (40,000 divided by 0.04).  

This is a quick calculation to give you the general idea. At Northwestern Mutual we believe a better approach to retirement relies on a personalized plan—that plan made just for you, with all your needs and goals (things a general rule can’t consider).

How much retirement income should you have?

That’s the million-dollar question (no pun intended). Your retirement goals and lifestyle will determine how much income you’ll need when you retire. Do your best to envision the type of retirement you want to have. An experienced financial advisor can then help you create a personalized savings target. It should also include what you might get from Social Security.

Consider retirement income risk factors

Guidelines may give you a rough estimate of how much you’ll need to retire, but they aren’t exact. The following risk factors could be game changers: 

• Living longer: You’ll want to plan ahead to make sure you don’t outlive your money. 

• Market volatility: The stock market naturally fluctuates. Having a diverse mix of income sources can help your money go further in retirement.  

• Taxes: This can be a biggie, especially if most of your income is tied up in tax-deferred accounts like 401(k)s and traditional IRAs. You’ll want to keep your tax liability in mind.  

• Health care costs and long-term care: These can add up to huge expenses in retirement. You can’t predict your future health, but you can still factor these things into your retirement strategy. 

Risks aside, don’t forget to consider guaranteed retirement income sources. Social Security, pensions, annuities and cash value that may be accumulating in a whole life insurance policy could lighten your financial load in retirement—but require some advanced planning. Your Northwestern Mutual financial advisor can help you create a customized savings plan. Our plans can consider thousands of scenarios and present options that can be paired with your goals and risk tolerance. 

Frequently asked questions

What is the reverse 4 percent rule?

The reverse 4 percent rule is a general guideline for how much to save and invest as you’re looking ahead toward retirement. It’s a goal to build toward as you work and save up.

Is the 4 percent rule obsolete?

The 4 percent rule is only a general guideline. It assumes your portfolio is split evenly between stocks and bonds—and depending on your retirement lifestyle, you could end up withdrawing too much (or too little) as a retiree.

How long will my retirement savings last?

No one can predict the future, but the right financial advisor can go a long way. They can help you create a financial plan that’s based on your unique goals—while factoring in potential risks that could threaten your retirement income.