What if the 4% Rule is Wrong

There is much debate about whether the 4 percent rule is still valid. What is the 4 percent rule? It is a rough way to calculate how much you can withdraw from your savings at the start of your retirement and have your money last for at least 30 years. It is a guide post to letting you know whether you’re saving enough. So if it’s wrong there are implications.

The debate stems from expected investment returns. Most investment analysts expect future investment returns to be lower than historical returns. Interest rates are lower than when the 4 percent rule was originally developed and the stock market is at all time highs. So the expectation is the future can’t be as good as the past. I recently saw an article that suggested the new rule should be 2.98 percent.

That is putting a very fine point on something that is completely unknowable. The truth is we can only make an educated guess about what will happen in the future. It is important to have a guess, but you must get used to the idea that it is just that.

There are two sides to the guess. One is the investment return you might expect and the other is the inflation rate on your lifestyle. If your initial savings withdrawal in retirement is 4 percent of your balance, it is assumed it will increase with inflation throughout your remaining life. If your first year’s withdrawal was $20,000 and inflation were 3 percent, your second year’s withdrawal would be $20,600, and so on.

It doesn’t really matter what the specific investment return or inflation rate is, as long as the investment return is higher than the inflation rate by enough to give you some time before your withdrawals start outpacing your investment gains. If low investment returns are accompanied by low inflation rates, the 4 percent rule should still work. It so happens that historically, with the exception of the stagflation years of the early 1980’s, inflation has remained below long-term return expectations.

In 2012, William Bengen, the author of the 4 percent rule, revisited his work to see if it was still valid. If you lived through periods such as the financial crisis or the tech bubble, would your savings still last? He found that his original conclusion was still correct. Even with the impact of dramatic market down-turns in the mix, an initial 4 percent withdrawal rate was still reasonable. That was because the lower market returns were accompanied by lower inflation.

But the real problem is not whether the rule should be 4 percent or something less. The real problem is people are not saving nearly enough to come close to being able to live off 4 percent of their savings. If you have saved enough that your initial withdrawal rate is just 4 percent of your savings, I’m not worried about you. You’ll find a way to make your money last, and it likely won’t even involve painful choices.

The fact is, for your savings to last, your withdrawals must be small relative to your total balance. That is intuitive. Your going to be living on your savings for many years. It’s obvious that if you take a lot out each year, it won’t last. Financial rules of thumb are good guide posts, and give you something concrete to work toward. So pick one. If you save enough to meet it, you’ll be fine.

Photo by Ivan Vranić on Unsplash

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7 thoughts on “What if the 4% Rule is Wrong

  1. Hi Ben,

    Yes, the formula is .04 x total savings = annual withdrawal in the first year. Your savings don’t have to cover all expenses, just what isn’t covered by Social Security. However if you take SS early, you’ll take a big hair cut on your monthly benefit.


  2. “The real problem is people are not saving nearly enough to come close to being able to live off 4 percent of their savings.”

    This is definitely the take-home here. Anyone reading about the “4% rule” is probably going to be fine : )

    If we are willing to fill up the standard deduction bucket, we can reduce our portfolio requirement by about $572,570 in 2020. Not difficult and definitely worth considering if we are able-bodied.

    Liked by 1 person

  3. Yes Yes Yes! When I was reading boglehead guide to retirement, they assume 4% is correct. Thank you for pointing this out Julie in your post.

    What is your opinion on the 3 fund portfolio? and managing it ourselves? I have been reading your blog for many months and you speak about using vanguard too. also trust that you can give a fiduciary non-bias answer given your early retirement 😉 🙂 😉


    • Hi Jennifer,
      Yes, the 3 fund approach is perfectly reasonable, and there is no reason you can’t manager your money yourself, especially while you are growing your savings. Even after you start drawing on your savings in retirement, you can do it yourself. Just keep an eye toward having enough in bonds to cover several years of projected savings withdrawals.


    • Hi Max,

      The current interest rates make buying a house very attractive. Whether it’s a good time for you depends on how much you have in savings. Not only will you need a down payment, but you should have savings set aside for maintenance and repairs that are inevitable. Even if you buy a brand new house, there will be stuff you need to spend money on in big chunks. So if you have savings to cover these as well as the down payment, then now is a great time to buy a house.


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