Is the 4% Rule for Retirement Still Safe?

Rethinking the 4% Rule in Retirement Planning

For decades, the 4% rule has served as a basic strategy for retirement withdrawals. However, shifts in life expectancy, interest rates, inflation, and market behavior prompt a more nuanced evaluation. While this rule once offered clarity, modern retirees are faced with a landscape far more complex than past generations. This chapter explores the foundational concept behind the rule, its limitations in today’s economic context, and adaptable approaches suited for long-term retirement stability.

What the 4% Rule Proposes

The 4% rule suggests that a retiree can withdraw 4% of their retirement savings in the first year and adjust this amount for inflation annually, preserving income over a 30-year period. We based this on historical simulations involving a balanced portfolio of stocks and bonds, aiming to provide simplicity and sustainability. The original model makes the following assumptions:

• A 30-year retirement duration
• A portfolio split evenly between equities and bonds
• Average historical returns based on U.S. markets between 1926 and the 1990s
• Moderate inflation aligned with long-term historical averages

Today’s conditions significantly differ from those during the development of this guideline.

Shifting Financial Realities

A set of evolving pressures now influence retirement strategies, challenging the assumptions baked into the 4% rule. These include:

Longevity Increases

Longer life expectancies mean retirees often need income support beyond 30 years. For many, particularly those retiring in their early 60s, the horizon may stretch to 35 or even 40 years, adding stress to static withdrawal plans.

Persistent Inflation

Recent inflationary cycles have impacted the purchasing power of fixed withdrawals. Annual increases based solely on traditional inflation adjustments may not keep pace with actual living cost increases in healthcare, housing, and other necessities.

Market Volatility

Since the original research supporting the 4% rule was based on back-testing, real-world unpredictability introduces risk. Sharp downturns early in retirement, known as sequence of returns risk, can significantly undermine portfolio longevity.

Interest Rate Suppression

Interest rates remained historically low for much of the 2010s and early 2020s. While rates have recently begun to rise, bond yields may not reliably generate the income once expected, especially in conservative portfolios.

The Rule’s Evolution: Insights From William Bengen

William Bengen, the financial planner who introduced the rule in the 1990s, later revisited his findings. By factoring in small-cap stocks and more diversified asset classes, his revised models suggested safe withdrawal rates could sometimes rise to 4.5%. However, Bengen also recognized that rates could fall below 4% under specific economic conditions, reinforcing that flexibility, not rigidity, is necessary.

Alternative Withdrawal Frameworks

As conditions grow more variable, a growing number of retirees and planners are gravitating toward adaptive approaches. These alternatives account for market behavior and personal goals rather than applying a uniform rule.

Dynamic Withdrawals

This approach adjusts spending based on market performance. Retirees scale back during downturns and cautiously increase withdrawals in strong market years, helping preserve portfolio health across cycles.

Bucket Strategy

Funds are divided into distinct buckets based on time horizons: short-term (cash and liquid assets), intermediate-term (bonds or dividend-paying stocks), and long-term (growth-oriented investments). This segmentation helps balance growth potential with risk control.

Guardrails Approach

Guardrails set predetermined withdrawal ranges. If a portfolio performs exceptionally well, withdrawals can increase within limits. If it performs poorly, the method suggests lowering withdrawals to stay within safe thresholds. It offers flexibility while still promoting discipline.

Personalizing Retirement Income Planning

No single rule fits every retirement scenario. Instead, retirees benefit from planning that reflects individual circumstances, such as lifestyle preferences, health conditions, and other sources of income. Consider the following adjustments when assessing your strategy:

• Assess expected annual expenses, both fixed and variable
• Factor in health-related costs and their potential rise over time
• Account for guaranteed income streams such as Social Security or pensions
• Consider tax implications of withdrawal timing and asset types
• Remain open to reducing spending or adjusting withdrawals during unfavorable market periods

Building Income Resilience

Diversifying retirement income sources can reduce reliance on portfolio withdrawals and cushion against market risk. Reliable income channels may include

• Real estate rental income
• Dividend-paying stocks
• Annuities structured for guaranteed payments
• Part-time or consulting work
• Business distributions or royalties

A well-diversified income plan can ease pressure on investment accounts and support lifestyle stability over decades.

Flexible Thinking Over Fixed Rules

Although the 4% rule remains a valuable benchmark, it is no longer a universally applicable solution. Retirees today face economic variables far more complex than those considered when the rule was first developed. Those planning for retirement should view the 4% figure as a guidepost, not a fixed rule, and adapt their strategy based on individual needs, portfolio performance, and economic shifts. Personalized planning, informed by market behavior and lifestyle goals, offers a more sustainable path forward.

Frequently Asked Questions

What is the 4% rule in retirement planning?

The 4% rule is a retirement withdrawal strategy that suggests retirees can withdraw 4% of their portfolio in the first year of retirement, adjusting that amount annually for inflation. Based on historical U.S. market performance, this strategy aims to extend retirement savings for approximately 30 years.

Does the 4% rule still apply in today’s market conditions?

Not universally. While it offers a helpful starting point, today’s financial realities, such as increased longevity, inflation volatility, and lower bond yields, mean that the rule may no longer be suitable for everyone. Many retirees now require more flexible, personalized approaches.

Why is longevity a challenge to the 4% rule?

With many people living well into their 90s, a 30-year withdrawal plan might fall short. If retirement lasts 35–40 years, the risk of running out of money increases, especially with a fixed withdrawal rate.

How does inflation affect the 4% rule?

Persistent or high inflation can erode purchasing power, especially if annual withdrawal increases are based on general inflation rates rather than specific cost-of-living changes, such as rising healthcare expenses.

What is the sequence of return risks?

This refers to the danger of experiencing market downturns early in retirement. If significant losses occur early, a portfolio may not recover in time, reducing long-term sustainability even if average returns later improve.

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Reviewed and edited by Albert Fang.

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Article Title: Is the 4% Rule for Retirement Still Safe?

https://fangwallet.com/2025/06/04/retirement-withdrawal-strategy/

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