This article is adapted from the business magazine Capital and is available here for ten days. Afterwards it will only be available to read at Like stern, Capital belongs to RTL Deutschland.

How much of their savings can pensioners spend each year without running out of money in retirement? A crucial question for private pension provision – perhaps today more than ever. The so-called four percent rule is a popular guideline, especially in the Anglo-American region. First calculated by US financial advisor William Bengen in the early 1990s and confirmed by researchers at Trinity University, the method aims to:

Retirees should withdraw money each year from a balanced portfolio of stocks and bonds. So much so that your assets are sufficient for regular payments over a period of 30 years. Independent of market fluctuations.

The whole thing works like this: First, investors have to estimate the initial value of their retirement portfolio. How much money do you need at least per year? Investors can withdraw four percent of this initial capital annually, adjusted for inflation. So if you withdraw 12,000 euros in the first year, you will have to withdraw 12,240 euros in the second year with an inflation rate of two percent and so on. This is intended to preserve purchasing power. But how useful is this rule in 2024?

“On paper it sounds very simple,” says Sandra Klug, investment expert at the Hamburg Consumer Center. “But the rule ignores some points and is, if at all, only applicable to a handful of financially well-educated, high-earning people who are risk-averse,” she says. Investors who later want to apply the four percent rule will have to save a comparatively large amount. “A withdrawal of 1,000 euros per month, if there is also a state pension, is a realistic minimum for the first year,” says Klug. To do this, investors would have to save initial assets of at least 500,000 euros.

The time of initial collection is also crucial. “If you retire but the prices are currently in the basement, investors have a problem because the sum at the beginning plays a bigger role than at the end,” she says. This problem is also called return order risk. According to Klug, investors who fully rely on the additional income are taking a high risk.

“Even high inflation for a longer period of time, like the one we just experienced, messes up the plan,” said Klug. In order for the savings to still be enough, there would have to be deflation or large price gains that would balance the whole thing out again. But it’s difficult to rely on that as a pensioner.

Calculations by the financial analyst Morningstar also show how much the general market situation can influence the withdrawal amount. In contrast to rule inventor Bengen, who based his calculations on historical data, Morningstar also used price and inflation forecasts. Starting in 2021, when bond yields were historically low and equity valuations and inflation forecasts were high, investors were only allowed to withdraw 3.3 percent, according to Morningstar. However, given lower inflation forecasts and higher bond yields, analysts estimate four percent again for 2023.

Because of these fluctuations, Morningstar recommends that the withdrawal rate not be fully adjusted for inflation. It would be better if it reflected around 75 percent of the current inflation rate to be on the safe side.

The rule also does not take into account unplanned additional costs. “If, for example, the refrigerator breaks or you want to go on a long trip, there is no leeway,” explains Klug. And the consumer advocate criticizes another point: “Adjusting the amount on your own every year and setting up new transfer orders is time-consuming and not that easy, especially for people without financial education or experience.”

Klug is familiar with such problems from daily advice. “What seems uncomplicated at 65 looks completely different at 85 or 90.” But if you seek help from an expert, you must deduct the cost of this service from the adjusted percentage or take a higher amount. However, this also increases the risk that the savings will not last for 30 years.

The bottom line is that Klug does not recommend the four percent rule. “It’s too complicated and too inflexible for most people.” Investors should seek independent advice at an early stage. “A bank payout plan combined with funds, fixed-term and daily deposits is often a suitable option,” says Klug. You also have to take care of this from time to time, but not too intensively.