Safe Withdrawal Rates in Retirement: The 4% Rule and Beyond

You’ve spent decades building your retirement nest egg. Now comes the hardest part: making it last. The 4% rule has been retirement planning gospel for 30 years, but is it still relevant in today’s environment of longer lifespans, low interest rates, and volatile markets? Let’s examine the science behind withdrawal strategies and explore modern alternatives.

The 4% Rule: Origins and Methodology

In 1994, financial planner William Bengen analyzed historical market data going back to 1926. He discovered that retirees who withdrew 4% of their portfolio in the first year, then adjusted that dollar amount for inflation each subsequent year, had never run out of money over a 30-year retirement—even through the Great Depression and 1970s stagflation.

The Math: If you have $1 million saved, you’d withdraw $40,000 in year one. If inflation is 3%, you’d withdraw $41,200 in year two, regardless of portfolio performance. This inflation-adjusted approach aims to maintain purchasing power throughout retirement.

The Assumptions: The 4% rule assumes a 50/50 stock/bond portfolio, a 30-year retirement, and historical market returns. These assumptions don’t fit everyone’s situation, which is why we need to look beyond the simple rule.

When the 4% Rule Works Well

The 4% rule remains a solid starting point for many retirees. It works best when:

You have a 30-year time horizon: Retiring at 65 with average life expectancy until 95 fits the original model perfectly.

You want simplicity and consistency: Setting a fixed withdrawal amount adjusted only for inflation makes budgeting straightforward.

Markets are fairly valued: The rule was tested through various market conditions, but starting valuations matter. Beginning retirement when stocks are reasonably priced improves success rates.

You have flexibility: The 4% rule has historically worked, but having some ability to reduce spending in down years increases its reliability significantly.

Modern Challenges to the 4% Rule

Several factors suggest we may need to adjust our thinking:

Longer Retirements: People are living longer and retiring earlier. A 60-year-old retiree might need their money to last 35-40 years, not 30. Longer time horizons increase the risk of portfolio depletion.

Lower Expected Returns: The 4% rule was based on historical periods that included higher bond yields and stronger equity returns. With bonds yielding less than inflation and many arguing stocks are expensive, future returns may be lower.

Higher Valuations: Research shows that starting retirement when stocks are expensive (high P/E ratios) reduces safe withdrawal rates. The CAPE ratio suggests current valuations are elevated compared to historical averages.

Sequence of Returns Risk: The order of returns matters enormously. Poor returns early in retirement can permanently damage your portfolio’s sustainability, even if returns average out over time.

Alternative Withdrawal Strategies

Dynamic Spending: Instead of fixed inflation adjustments, adjust withdrawals based on portfolio performance. Strong years allow for higher spending; weak years require modest cuts. Research suggests this can increase sustainable withdrawal rates.

The Guardrails Approach: Set upper and lower portfolio value thresholds. If your portfolio grows above the upper guardrail, increase spending. If it falls below the lower guardrail, cut spending. This balances stability with flexibility.

Required Minimum Distributions (RMD) Method: Calculate withdrawals using the IRS’s RMD tables, dividing your portfolio by your life expectancy each year. This ensures you never fully deplete the portfolio while allowing higher withdrawals when you’re younger.

Bucket Strategy: Divide your portfolio into time-based buckets—cash for years 1-2, bonds for years 3-7, stocks for year 8+. This reduces sequence risk by ensuring you don’t sell stocks in a downturn to fund living expenses.

Floor-and-Upside: Cover essential expenses with guaranteed income (Social Security, pensions, annuities), then use portfolio withdrawals for discretionary spending. This creates a safety floor while preserving upside.

Optimizing Your Personal Strategy

The right withdrawal strategy depends on your unique circumstances:

Assess Your Flexibility: Can you cut spending in bad years? Do you have other income sources? If you need every dollar, you require a more conservative approach.

Consider Your Legacy Goals: Planning to leave an inheritance? You’ll need a lower withdrawal rate. Want to spend it all? You can potentially withdraw more.

Factor in Social Security: Delaying Social Security increases your guaranteed income floor, allowing for potentially higher portfolio withdrawals later.

Account for Healthcare Costs: Healthcare expenses often increase with age. Build in escalating withdrawal rates for later retirement years.

Use our Retirement Planner tool to model different scenarios—conservative 3% withdrawals, standard 4%, or more aggressive 5%. See how market volatility affects each strategy and find the approach that lets you sleep well at night.

The 4% rule remains a useful benchmark, but it’s not a one-size-fits-all solution. Your personal withdrawal strategy should account for your specific time horizon, risk tolerance, spending flexibility, and market conditions. The key is being intentional and adaptable—start with a plan, monitor it regularly, and be willing to adjust as circumstances change. Model different scenarios with our Retirement Planner to find the withdrawal strategy that balances enjoying your retirement with ensuring your money lasts.