For decades, the 4% rule has been the go-to retirement strategy: withdraw 4% of your portfolio each year, and your money should last 30 years. But is that still a safe assumption in today’s market?
As an advisor who’s helped clients navigate retirement through rising interest rates, inflation spikes, and market downturns, I believe this rule needs context—and sometimes a complete rethinking.
What Is the 4% Rule?
The 4% rule was born out of the “Trinity Study” in the 1990s. It proposed that retirees could safely withdraw 4% of their retirement portfolio in the first year of retirement, then adjust for inflation annually, and likely not run out of money over a 30-year period.
Example: If you retire with $1 million, you’d withdraw $40,000 in the first year, then increase that amount each year based on inflation.
Why the 4% Rule Might Be Outdated
Today’s retirees face a very different landscape than in the 1990s:
- Longer life expectancies mean more than 30 years in retirement.
- Lower bond yields reduce traditional portfolio income.
- Higher market volatility increases sequence of returns risk.
- Inflation erodes real purchasing power.
Factors That Should Influence Your Withdrawal Strategy
1. Market Conditions at Retirement
Retiring in a bear market can significantly impact your portfolio’s longevity. This is called sequence of returns risk—and it’s one reason why the 4% rule might fail.
2. Asset Allocation
A portfolio heavily weighted in stocks vs. bonds will behave very differently over a 30-year period. A more diversified approach may support a higher withdrawal rate—or require a lower one depending on risk.
3. Tax Efficiency
How you draw from tax-deferred vs. Roth vs. taxable accounts affects how much you keep after taxes.
4. Flexibility in Spending
Many retirees don’t spend the same every year. A dynamic approach (e.g. withdrawing more in good years, less in down years) may outperform a rigid 4% plan.
What Are the Alternatives to the 4% Rule?
- The 3% Rule: A more conservative approach, often suggested in low-yield environments.
- The Guardrails Method: Adjust withdrawals based on portfolio performance, originally developed by Guyton-Klinger.
- The Bucket Strategy: Segmenting assets into short-, mid-, and long-term buckets.
- Dynamic Withdrawal Plans: Software-assisted models that recalculate safe withdrawal rates each year.
Real-Life Example: A Flexible Plan That Worked
One couple I worked with had $1.2M in retirement assets. Rather than sticking to a fixed 4%, we built a guardrails-based withdrawal plan tied to market performance and their actual spending needs. During market highs, they took more for travel and gifts. In down years, they trimmed spending slightly. The result? Their portfolio lasted longer than expected, and they lived with far less stress.
Common Mistakes with Withdrawal Strategies
- Rigid adherence to old rules without accounting for today’s market.
- Ignoring taxes when planning withdrawals.
- Not adjusting spending based on market performance.
Final Thoughts
The 4% rule is a useful starting point—but not a one-size-fits-all solution. Your safe withdrawal rate in retirement should reflect your goals, market realities, tax situation, and spending flexibility.
Want help building a personalized, dynamic withdrawal strategy that fits your unique retirement picture? Reach out today—I’ll help you make your money last longer, with less stress and more confidence. We’d be happy to help you find your safe withdrawal rate in retirement.
Thomas Clark is a Series 65 licensed investment advisor and experienced trader. He specializes in investing, retirement planning, and market analysis, helping individuals build wealth and make informed financial decisions.