Is the 4 percent rule safe for engineers about to retire?

Step 1: How long was the original 4% supposed to last?

The original 4% research tested a 30-year retirement, historical US stock and intermediate Treasury returns, and portfolios holding 50% to 75% in stocks. William Bengen's 1994 work found that a 4% first-year withdrawal, increased for inflation afterward, survived every historical period he tested. He looked backward at what already happened; nothing in that study predicts the markets Nils or you will retire into.

People often change the method without noticing. In Bengen's version, year one's withdrawal is 4% of the opening balance, and each later year's dollar figure is the prior one adjusted for inflation. Taking 4% of whatever remains each year is a variable-spending method; it will not run out through withdrawals alone, but your paycheck can shrink sharply after a market drop.

Treating 4% as take-home pay is the slip at this step. Traditional 401(k) and IRA withdrawals are generally ordinary income, and fund or advice costs come out before your spending reaches checking. Rename the spreadsheet cell “gross draw,” then add separate cells for estimated tax, investment costs, and the monthly transfer you can actually spend.

The historical test was narrower than its reputation

Gross draw is not your household paycheck

Step 2: The paperwork behind the balance in your spreadsheet

Gather the numbers before choosing a rate. A rate applied to the wrong balance does more damage than a few decimal places of portfolio modeling. Ritholtz Wealth Management asks clients to separate assets they own today from compensation that may disappear when employment ends, then to put each account in its own spreadsheet row.

Counting unvested RSUs in the balance is a paperwork mistake with a direct cost. If $60K of Nils's $420K stock line is unvested and forfeited when he leaves at age 60, his 4% draw is $2,400 a year too high. Pull the vested-only figure from the stock plan portal, rebuild each withdrawal rate, and consider whether waiting for the next vest date changes the retirement date.

A Form 1040 shows income and total tax from the prior year, which offers a rough starting point for estimating a withdrawal's tax bite. The IRS receives that form; it does not tell you your future rate. Your Social Security estimate comes from your my Social Security account at the SSA, not from a guess based on a coworker's benefit.

Use owned assets, not headline compensation

• Brokerage and 401(k) statements: Download the latest quarter from each custodian website.
• Equity plan statement: Use the vested-only line in the stock plan administrator portal.
• Fund expense ratios: Read each fund's fact sheet or prospectus.
• Last Form 1040: Divide total tax by total income for a rough average rate.
• Social Security estimate: Download it from your my Social Security account at the SSA.

Step 3: Nils's December statement run through three withdrawal rates

For illustration, Nils is a hypothetical 57-year-old single electrical engineer at a semiconductor maker. His December brokerage and equity-plan statements show $1.4M total, including $420K in employer stock and vested RSUs. He plans to retire at age 60, and his sheet applies 4%: $1.4M × 4% = $56K a year, or about $4,667 a month before tax.

Now stress the concentration before treating the result as income. If the employer stock falls 40% before he leaves, the loss is $420K × 40% = $168K. His balance becomes $1.4M − $168K = $1.232M, while the same $56K draw becomes $56K ÷ $1.232M, or about 4.5%. Before Ritholtz Wealth Management settles on a draw rate, it measures how much of the balance rides on one employer's stock; the 4% research assumed diversification, not 30% in one company. Every investment can lose value, including the money first put in.

Assume a 15% average tax on 401(k) withdrawals for illustration. Nils's $56K gross draw nets $47,600, or about $3,967 a month. A 3.5% start is $49K a year, about $4,083 a month gross, and gives a 35-year plan more room. A calculator on this site can check the same arithmetic using your own balances and cost assumptions.

What does a $1.5M balance actually pay? The table answers that question before taxes. Every half point changes first-year spending by $5K a year per $1M, and a 1% cost layer cuts a $1.5M portfolio's available spending from $60K to $45K at a 4% draw.

Once the paychecks stop, Nils should model a monthly transfer to checking, not one annual number parked in a spreadsheet. His plan must also name the funding source: taxable brokerage cash and dividends may cover part of a month, while a planned retirement-account withdrawal fills the remaining gap after a tax review. Withholding tax at the source can keep April from producing an avoidable bill.

A stock drop changes the rate without changing the bill

Turn an annual draw into a monthly cash transfer

Step 4: If I retire at 60, the money has to last to 95

A retirement from age 60 to age 95 lasts 35 years, five years beyond Bengen's test window, so a 3.5% stress test is sensible when the plan also carries costs above 0.5% a year or concentrated stock. On Nils's $1.4M, each half point equals $7K a year. If your planned draw is already below 3%, fine-tuning the rate deserves less attention than checking actual spending and taxes.

Step 5: What age does each date change the withdrawal?

For someone born in 1969, the withdrawal calendar begins at age 60 with the last paycheck and final RSU vest. In the first January of retirement, set the year's gross draw and the monthly checking transfer.

At age 62, Social Security can begin; at age 65, Medicare begins, and the CMS Medicare premium surcharge is set by the tax return from two years before, so a large withdrawal at 63 shows up in Part B premiums at 65. Social Security claiming is a separate choice worth modeling alongside withdrawals.

At age 67, this reader reaches full retirement age under SSA rules for people born in 1960 or later. At age 70, delaying no longer increases the monthly Social Security benefit. At age 75, required minimum distributions begin for people born in 1960 or later. The IRS sets those required withdrawals, so they can override a carefully chosen portfolio draw later in retirement.

The RMD starting age moved from 70½ to 72, then to 73, and now to 75 for people born in 1960 or later. An old plan may assume taxable withdrawals begin sooner than they now must. Nils could have up to 15 years after leaving work to choose pre-tax withdrawals on his own schedule, including a Roth conversion strategy if its tax math holds up.

Costs deserve the same refresh. A 4% sheet built when funds charged 1% or more had less room than the same sheet using lower-cost index funds. Ritholtz Wealth Management also asks who inherits the accounts. Nils is single, and most non-spouse heirs generally must empty an inherited IRA within 10 years, paying ordinary income tax at their own rates; each beneficiary form should name people rather than “my estate.”

The calendar starts with the final vest

Older retirement models may carry stale assumptions

Step 6: The spreadsheet cells Ritholtz Wealth Management questions first

Ritholtz Wealth Management starts with the share held in one employer's stock, the all-in cost line, and whether the draw cell is gross or net of tax. It then compares planned retirement years with the 30 years in the original test. A second-opinion plan review can pressure-test those cells without pretending there is one permanently safe number.