The Classic 4% Rule

The 4% rule comes from long term investment research and is designed to provide a stable, inflation adjusted income throughout retirement. 

How it works 

In your first year of retirement, you withdraw 4% of your investment balance (the wealth you have aside to fund your retirement). Each year after that, you increase the dollar amount by inflation. This approach aims to make sure your savings last at least 30 years. 

For example, if you retire with $500,000 invested, you will withdraw $20,000 (4%) in your first year. If inflation is 2%, you would withdraw $20,400 the following year.

Why people like it

Many people like this approach because it provides a predictable, inflation-adjusted income throughout retirement. It is also designed to support longer retirements by managing longevity risk, and makes budgeting and financial planning simpler.

Limitations of the 4% Rule

The 6% Rule

The 6% rule takes a different view, recognising that many retirees naturally spend more in the early years and less later on.

How it works

Withdraw 6% of your portfolio in the first year, then take the same dollar amount each year. Withdrawals are not increased for inflation.

For example, with $500,000 invested, you would withdraw $30,000 annually. Over time, inflation reduces its purchasing power, which often aligns with falling spending needs.

Why it can work well

This approach can work well as it allows for higher spending during active “go-go” retirement years, automatically reduces real spending later in life, and better matches real world behaviour without complex planning. Rather than trying to maintain a constant lifestyle forever, this approach accepts that travel, hobbies, and discretionary expenses usually declines with age.

Limitations of the 6% rule

The main limitation of the 6% rule is that withdrawing more early in retirement increases the risk of depleting savings too quickly, especially if your investments perform poorly in the early years. Because withdrawals are not adjusted for inflation, the real value of income gradually declines, which can be challenging later in life if essential costs rise.

How NZ Super Changes Retirement Planning

For New Zealanders, NZ Superannuation plays a crucial role in retirement income. It provides an inflation indexed income for life, a stable base for essential living costs, as well as protection against longevity risk.

Because NZ Super often covers core expenses, your investment assets can act as a lifestyle top-up rather than a source of essential income. In this context: The 4% rule may suit those with high ongoing costs, such as renters, and the 6% rule can work well when investments are funding discretionary spending.