I No Longer Swear by ‘the 4% Rule’ and This Is Why

The 4% rule has long been a popular rule of thumb that’s used to help people decide on a safe withdrawal rate from their retirement accounts. It was designed in the 1990s by a researcher named Bill Bengen and the big benefit of the rule is that it’s really simple.

In fact, I used to recommend the 4% rule to people regularly because it helps future retirees understand within seconds how much income their nest egg can actually produce and it helps current retirees avoid making the mistake of withdrawing too much or too little from their retirement accounts because they don’t understand how to pick a safe withdrawal rate. 

Now, however, I no longer swear by the 4% rule and I have a different recommendation instead. Here’s why. 

The problems with the 4% rule

There are a number of big problems with the 4% rule that have caused me to reconsider my position that it’s a good way to estimate the amount you can withdraw from your retirement accounts.

One of the biggest issues is that it’s based on assumptions that may no longer be accurate. In fact, Morningstar researchers have now revised the 4% rule because life spans are projected to be longer than when the rule was created and returns are projected to be lower. Researchers now believe a safe withdrawal rate is just 3.7%. If this data is correct, and there’s every reason to believe it is, people who follow the 4% rule could end up taking too much money out of their accounts and running short of retirement. 

There’s also another problem. The 4% rule assumes that a 30-year retirement is good enough since the rule is designed to make sure your money lasts that long. Many people are now interested in retiring at a younger age, though, and there are entire movements — like the FIRE movement — dedicated to leaving the workforce young. For those who want to retire in their 40s or 50s, a rule that makes sure your money lasts for 30 years isn’t going to cut it. 

Lastly, the 4% rule isn’t very responsive to either the needs of retirees or the performance of their investments. Some people may not need to withdraw a steady amount each year and may be better off adjusting the amount they take out up or down depending on their financial circumstances. Likewise, if your investments are underperforming, you may need to adjust how much you take out while you may be able to withdraw more if they are overperforming.

A withdrawal strategy that takes these issues into account can help you have a better retirement. 

How much should you withdraw?

Instead of following the 4% rule, the best approach is to work with a financial advisor to determine a personalized withdrawal strategy that works best for you given your financial situation and goals for retirement. While it takes more effort to make a personalized plan, it’s worth doing considering how much is at stake when it comes to taking money out of your retirement plan. 

You can also opt for a more conservative 3.7% withdrawal rate when estimating how much income retirement accounts will provide in the future, as it’s better to overestimate how much you need to save than to underestimate it or cut it close.  

If you plan for a conservative withdrawal rate and then work with an advisor during retirement to decide on a strategy that makes sense, you should be able to truly enjoy retirement without any financial worries — and have a much more secure future than you would if you just followed the 4% rule despite its issues. 

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