The 4% Rule: Does It Still Work for Retirement Withdrawals?

The 4% Rule: Does It Still Work for Retirement Withdrawals?

Introduction

One of the most widely cited retirement guidelines is the 4% rule—the idea that retirees can safely withdraw 4% of their portfolio in each year of retirement, adjust for inflation annually, and have a high probability of not outliving their savings over 30 years.

But with rising lifespans, volatile markets, and low bond yields, many wonder: Is the 4% rule still valid today?

In this article, we’ll examine:

  • The origins of the 4% rule
  • Why some experts argue it’s outdated
  • Modern alternatives for sustainable withdrawals
  • How to customize a strategy for your retirement

1. What Is the 4% Rule?

The Trinity Study & Its Findings

The 4% rule stems from a 1994 study by financial advisor William Bengen, later expanded by the Trinity University study (1998). Researchers analyzed historical market data (1926–1976) and found that:

  • A retiree with a 60% stocks/40% bonds portfolio could withdraw 4% annually (adjusted for inflation) with 95%+ success over 30 years.
  • The rule was designed to survive worst-case scenarios, like retiring in 1966 (a period of high inflation and poor market returns).

Example of the 4% Rule in Action

  • Retirement nest egg: $1,000,000
  • Year 1 withdrawal: $40,000 (4%)
  • Year 2+: $40,000 + inflation adjustment

2. Criticisms of the 4% Rule Today

Why Some Say It’s Too Risky Now

  1. Lower Expected Returns
    • Bond yields are near historic lows (reducing the "safe" income from the 40% bond allocation).
    • Stock valuations are high, suggesting lower future returns.
  2. Increased Longevity
    • A 65-year-old today has a 50% chance of living to 85+ (vs. 79 in 1950).
    • The 30-year timeline may be too short for many retirees.
  3. Sequence-of-Returns Risk
    • Poor market performance early in retirement disproportionately harms portfolio survival.
    • Example: Retiring in 2000 (dot-com crash) or 2008 (financial crisis) stressed the 4% rule.

Updated Research: Success Rates May Be Lower

  • A 2013 Morningstar study suggested a 3% withdrawal rate may be safer for today’s retirees.
  • Wade Pfau (2020) found a 4% withdrawal had just a 50% success rate in some international markets.

3. Modern Alternatives to the 4% Rule

Option 1: The Dynamic Withdrawal Strategy

Instead of rigid inflation adjustments, flexible spending rules adapt to market conditions:

  • Spending cuts in down markets (e.g., skip inflation adjustments after a 10% portfolio drop).
  • Spending increases in up markets (e.g., cap raises at 5%).

Pros: More responsive to real-time portfolio performance.
Cons: Requires discipline and variable income tolerance.

Option 2: Guardrail Approaches (e.g., Vanguard’s)

  • Set a floor and ceiling for withdrawals (e.g., 2.5% to 5.5% of portfolio annually).
  • Adjust based on portfolio performance.

Option 3: Bucket Strategies

  • Bucket 1: 2–3 years of cash (for near-term spending).
  • Bucket 2: 5–10 years of bonds (for medium-term needs).
  • Bucket 3: Stocks (for long-term growth).

Pros: Reduces panic selling during downturns.
Cons: More complex to manage.

4. How to Personalize Your Withdrawal Rate

Factors That May Allow a Higher Rate (>4%)

✔ Shorter retirement horizon (e.g., retiring at 70).
✔ Other income sources (pensions, part-time work, rental income).
✔ Willingness to reduce spending in market downturns.

Factors That May Require a Lower Rate (<4%)

✔ Early retirement (e.g., retiring at 50 with a 40+ year horizon).
✔ High healthcare costs or long-term care needs.
✔ Low risk tolerance (unwilling to cut spending in crashes).

Custom Withdrawal Rate Formula

A simplified approach:

  1. Estimate annual retirement spending (e.g., $50,000).
  2. Subtract guaranteed income (e.g., $20,000 from Social Security).
  3. Divide the remainder by 3–4% to find needed savings:
    • 30,000÷0.04=750,000
    • 30,000÷0.03=1,000,000

5. The Bottom Line: Is the 4% Rule Dead?

Key Takeaways

✅ The 4% rule is a starting point, not a guarantee.
✅ Flexibility improves success rates—avoid rigid inflation adjustments.
✅ Personal factors matter more than ever (longevity, market valuations, spending needs).

Action Steps for Retirees

  1. Stress-test your plan using tools like FIRECalc or Monte Carlo simulations.
  2. Consider a "hybrid" approach (e.g., 3.5% base + flexible adjustments).
  3. Consult a fiduciary advisor to model scenarios tailored to your assets.

Disclosures

This article is for informational purposes only. Withdrawal strategies involve risk, including potential portfolio depletion. Past performance does not guarantee future results. Consult a financial or tax advisor before making retirement decisions.

Need help designing a withdrawal strategy? Contact us for a personalized retirement review.