Retirees: The 4% Rule May Be Dead David BerenSeptember 20, 2025 at 9:19 PM 0 No matter where you go online, there is a betterthangood chance that you will see the 4% rule come up around the idea of retirement.
- - Retirees: The 4% Rule May Be Dead
David BerenSeptember 20, 2025 at 9:19 PM
0
No matter where you go online, there is a better-than-good chance that you will see the 4% rule come up around the idea of retirement. This is basically the prevailing rule of thumb as to how much money you can withdraw every year and live on your investments indefinitely.
Key Points -
The 4% rule is the primary strategy for soon-to-be retirees to judge how much they need to live while retired.
The problem is that this strategy is no longer as true as it once was, given rising inflation and the cost of retirement.
Even the inventor of the 4% rule says it's no longer applicable in today's world.
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The problem with the 4% rule is that since it's become one of the primary investment strategies, the market and retirement needs have shifted. This begs the question as to whether or not the 4% rule is now outdated, and if so, what is the rule of thumb to retire comfortably today?
What Is the 4% Rule?
Often considered the go-to strategy for retirement spending is pretty simple overall. This is basically a strategy of taking all of the investments you have and withdrawing 4% of the balance during your first year of retirement.
After the first year of retirement, you now adjust the dollar amount to withdraw based on inflation. The prevailing idea is that if you follow the 4% strategy, you are not likely to outlive your money for at least 30 years, which is often longer than most people live during retirement.
In other words, let's say you have $1 million total for retirement, which in year one, you would withdraw $40,000 to live on. However, if the cost of living rises 2% in the same year, you would increase your percentage withdrawal next year by the same amount, so year two would require a $40,800 withdrawal, and so on for the next 30 years.
The challenge and the reason why people are asking if this rule is outdated is that it assumes you only withdraw the same amount of money every year, adjusted for inflation, and never deviate from this path.
Primary Concerns Over the 4% Rule
Even though the 4% rule has gained a lot of traction and support over the years, it's hard to argue that it's a rigid rule that lacks flexibility. This rule doesn't allow for any flexibility in spending more in one year, regardless of the reason. The reality is that expenses can and will change during retirement, and the 4% rule doesn't account for that.
Separately, the 4% rule also operates under the assumption that you have a portfolio that can and will last for 30 years, which seems ideal, at least on paper. Given the rigidity of the rule, it stands to reason that if you have to spend more in a few of the years during this same time period, you no longer have enough to live for 30 years under your initial investment.
In addition, there is a concern that most people ignore the reality of taxes or investment fees while trying to live by the rigidity of the 4% rule. If you withdraw $40,000 in the first year, you still have to pay taxes, so you don't actually have $40,000 to live on. Instead, you would pay around $6,101 if you live in Florida, which means you are actually living off of $33,899, or considerably less than you envisioned.
The 4% Rule No Longer Works, Says This Important Individual
When financial planner William Bengen came up with the 4% rule in the early 1990s, he was confident that this strategy would help people live a comfortable retirement and not run out of money. Now, 30 years later, Bengen has revamped his own strategy, and he now says that 4.7% is the new starting point for people. At this number, Bengen says that most people can sustain their annual withdrawals, all while encouraging a strong amount of diversification in someone's portfolio.
His philosophy is now to invest in a broad portfolio of equity and fixed-income asset classes that will help investors see a strong return that can ensure the 4.7% new rule of thumb for withdrawing in the first year of retirement. The thing is, according to research, almost 61% of all financial planners are still advising their clients of the 4% withdrawal rule.
However, one area that has changed is that with retirees being unable to predict the future of spending, some financial planners are now recommending annuities. This means that if the same investor with a $1 million retirement fund took $333,000 and converted it into an annuity, they could boost their annual income to as much as $52,667, while still having $666,667 left in their portfolio after the first year. This would give them approximately $1,056 more per month to spend, which is not a small amount of money that can cover emergency expenses, extra nights out with friends, hobbies, etc.
The 4% rule also ignores the likelihood of Social Security, which means that individuals might have more than $40,000 to spend annually, so there is no math in this formula that allows for this reality, which might enable them to let their portfolio grow even more with a larger principal as well as last beyond the 30-year timeframe.
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