The 4% Rule Is Dead – or maybe not

The debate rages on. How much can safely be withdrawn from retirement savings with a goal of not running out of money? As you can see below, even after a detailed analysis any conclusion about a percentage less than four percent carries many assumptions.

At issue is bond interest rates which are low thus the mix of stocks and bonds may not provide the total return assumed in the 4% rule … or they may.

What to do?

There area few ways to hedge your bet:

  • Slightly lower your withdrawal rate
  • Skip or modify the inflation adjustment used in the 4% rule
  • Accumulate income generating funds outside of your qualified retirement accounts – which by the way is a good idea in any case.
  • Overshoot your mark to provide more flexibility. That is, if your plan says you need $750,000 to meet your retirement income needs using 4%, aim for $850,000 instead.

The withdrawal rate debate — that is, what is the best percentage to pull from retirement savings each year — has been heating up, especially as interest rates have been near zero. Although the 4% rule, first noted by Bill Bengen in 1994, has been a standard recommendation, that number has come under more scrutiny of late.

Bengen used a 30-year time horizon, starting in 1926, to demonstrate why the 4% rule worked. He assumed a portfolio holding 50% stocks and 50% fixed income securities. Using those same assumptions, three Morningstar researchers found that the 4% rule may “no longer be feasible.” Christine Benz, director of personal finance and retirement planning; Jeff Ptak, chief ratings officer; and John Rekenthaler, vice president and director of research, outline their reasoning in a recent paper, The State of Retirement Income: Safe Withdrawal Rates.

“Because of the confluence of low starting yields on bonds and equity valuations that are high relative to historical norms, retirees are unlikely to receive returns that match those in the past. Using forward-looking estimates for investment performance and inflation, Morningstar estimates that the standard rule of thumb should be lowered to 3.3% from 4%,” they state in the paper.

That said, “this should not be interpreted as recommending a withdrawal rate of 3.3%,” they say, adding that their conventions underlying their calculation were “conservative.”

In the study, they presumed: A time horizon that exceeds most retirees’ expected life spans. Fully adjusting all withdrawals for the effect of inflation. A fixed withdrawal schedule that does not react to changes in investment markets, A high projected success rate for the plan (90%).

The paper demonstrates that “by adjusting one or more of those levers, current retirees can safely withdraw a significantly higher amount that the 3.3% initial projection might suggest.”

Source: The 4% Rule Is Dead: New Morningstar Study | ThinkAdvisor


  1. I thought the 4% formula included some measurements of inflation. Am I wrong? And if you have an individual yearly living expense of $65000and a portfolio to support that over twenty years after retirement at 67 would you not have enough money at 4%? So please show me how I’m wrong. I guess include inflation at roughly 2%.


  2. I don’t think the 4% rule is dead because it was never a rule but a guideline. The real rule is to take out slightly less than your personal portfolio Rate of Return (averaged). If your ROR is 3% because you are bond heavy, then 4% withdraw won’t work.
    If your portfolio is largely in stock index funds, you could have an ROR of over 12% this year. Could you take out 11% next year? Yes, but it is better to only take out 4% and leave the rest invested for negative ROR years.
    I think the real beauty of the 4% rule of thumb is for planning purposes. While you are still working, when looking at all your retirement income sources, how much can I expect? If you need a certain amount to live on, you know how big to grow your investments. Either invest more, save more, work longer, or lower your retirement expectations.
    In retirement it prevents you from taking out half your investment savings to buy a motor home without realizing that you might have long term conquences funding your retirement. Nothing says you can’t take a large lump sum but at least you’ll know what you can expect once you do.


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