Is the 4% Rule Still Working?

The 4% rule has become the standard norm for retirement spending was established 28 years ago. It was in 1994 when financial adviser William Bengen created the 4% rule, a general guideline for how much to safely withdraw in retirement. It is reasonable to question whether the formula is still effective.

How the 4% Rule Functions

Suppose you begin with a $2,500,000 portfolio. In your first year of retirement, you are permitted to take 4% of your account’s balance, or $100,000.

That establishes the baseline. In subsequent years, the withdrawal amount increases with inflation. If inflation is 2% in the second year, you will withdraw $102,000.

Theoretically, this figure indicates that in a worst-case investment situation, your assets should still last 30 years, according to Karen Birr, manager of a retirement consulting for Thrivent in Minneapolis. Bengen made several assumptions when he formulated the rule that only sometimes holds in the real world.


First, Bengen assumed that a retirement portfolio would be split around 50/50 between stocks and bonds, using historic market data from 1926 to 1976 to determine returns. Dan Keady, a certified financial planner and chief financial planning strategist at TIAA in Charlotte, North Carolina, has particular concerns with utilizing historical returns. For one reason, bond interest rates were higher in the past, but Keady suggests that retirees now may require up to 75% of their portfolio to be invested in stocks to provide sufficient income.

Investing in more inequities in a terrible market when the bottom appears nowhere in sight can be challenging for retirees to swallow. Another option is to drop the 4% baseline withdrawal rate to “a little over 3%, maybe 3.3%,” says Keady. You must either accept a lower salary or save more for retirement, and to make the same income at 3%, you must have a 33% bigger portfolio.


Bengen also believed that funds for retirement would last 30 years. However, as life expectancies have increased over time, today’s funds may need to endure 35 or even 40 years. This may also need a reduction of the 4% rate, but some financial advisors warn that this might lead to excessive austerity, particularly if markets recover. Sri Reddy, senior vice president for retirement and income at Principal Financial Group in Des Moines, Iowa, notes it’s usual for folks to be so frugal with their expenditures that they have more money three to five years after retirement.

Bengen advised increasing the goal rate to 4.5 percent or perhaps 5 percent when he observed that many seniors passed away before depleting their funds.

Birr states having a surplus at the end of life is not terrible. Make sure it’s something you desire. If you are concerned about outliving your investments, Keady recommends converting a portion of your portfolio into an annuity to provide a lifetime income. The combination of an annuity and Social Security benefits should provide sufficient income to satisfy fundamental requirements. At the same time, the 4% rule applies to your investment portfolio for discretionary expenses such as holidays and hobbies. In a terrible investment year, it is possible to reduce discretionary expenditure without impacting basics.


 Inflation averaged 2% and 3% when Bengen introduced the 4% guideline, compared to 8.6% in May. For newly retired individuals, withdrawing more at the outset to keep up with inflation, especially when the market is down, might derail their retirement strategy. Suppose we see two years of 7% inflation, adds Keady.

A person who began withdrawing $100,000 yearly would withdraw $114,490 in year three. This isn’t easy to maintain since you will continue to build on these higher-than-anticipated withdrawal rates.

One alternative is to annually examine the performance of your portfolio and inflation and change the withdrawal rate to fit your objective. It should be reduced if inflation increases the basic withdrawal rate to 6% per year.

If a bull market boosts your portfolio’s value, you may be able to withdraw less than 3% or 4% without altering your lifestyle. Once you reach the age of 72, minimum distribution requirements may force you to withdraw more than you wish. Birr states that the first-year RMD percentage begins at 3.65% and grows with age.


Adjusting the withdrawal rate yearly also addresses a second Bengen assumption: that retirement expenditures increase linearly, but in reality, they vary.

Early on, retirees tend to spend more. Reddy explains as people age; their expenditure tends to decrease before perhaps increasing for late-life health care costs” He encourages clients to spend more initially and then revise their budget if it looks like they may fall short. Birr reminds us that the 4% guideline is merely an estimate because everyone’s circumstances are unique. Life events will occur, and you must be adaptable.