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The 4% Rule: Why It Doesn't Always Work for Retirement Planning

The 4% Rule: Why It Doesn't Always Work for Retirement Planning

| September 07, 2023

The 4% rule has been a widely accepted guideline for retirement planning for decades. This rule suggests that you can safely withdraw 4% of your retirement portfolio's initial value each year, adjusting for inflation, to ensure your savings last throughout your retirement years. While this rule has been a helpful starting point for many retirees, it's important to recognize that it doesn't work in all situations. In this blog post, we'll explore why the 4% rule may not be a one-size-fits-all.


  1. Market Volatility


One of the fundamental reasons why the 4% rule doesn't work for everyone is market volatility. The rule assumes a consistent annual return on investment, but the real world is far from predictable. Financial markets can experience significant fluctuations over short periods, impacting the sustainability of a fixed withdrawal rate. A study conducted by the American Association of Individual Investors (AAII) revealed that in bear markets, the 4% rule can deplete a retirement portfolio more rapidly than anticipated.


  1. Low-Interest Rates


Persistently low-interest rates in recent years have added to the concerns surrounding the 4% rule. When bond yields and other fixed-income investments provide minimal returns, retirees face the challenge of generating sufficient income from their portfolios. As the U.S. Federal Reserve has kept interest rates near historic lows, this has created an environment where the 4% rule may lead to greater risk of running out of money prematurely.


  1. Increased Lifespan


People are living longer, and retirement can now span several decades. This longevity risk is not adequately addressed by the 4% rule, which was originally designed for a 30-year retirement. Research from the Society of Actuaries suggests that retirees need to be cautious about adopting a fixed withdrawal rate, as it may not provide enough income to support them throughout their extended retirement years.


  1. Sequence of Returns


The sequence of investment returns during the early years of retirement can have a significant impact on the sustainability of a retirement portfolio. If you experience poor returns or market downturns in the initial years of retirement, it can substantially deplete your assets, making it difficult to recover even if markets improve later on. A study from Wade Pfau, a leading retirement researcher, highlights the vulnerability of the 4% rule to adverse early sequences of returns.


  1. Individual Circumstances


Every individual's financial situation is unique. Factors such as health, lifestyle choices, unexpected expenses, and other personal circumstances can significantly impact retirement planning. Relying solely on a fixed withdrawal rate may not allow retirees the flexibility needed to adapt to changing financial needs.


While the 4% rule has served as a useful guideline for many retirees, it is not a universal solution. Market volatility, low-interest rates, increased lifespan, the sequence of returns, and individual circumstances all contribute to the rule's limitations. As retirement planning requires a personalized approach, it's essential to consider these factors and consult with a financial advisor to develop a strategy that aligns with your specific goals and risk tolerance. In today's ever-changing financial landscape, flexibility and adaptability are key to ensuring a secure retirement.




  1. AAII Journal, March 2009 - "Revisiting the 4% Rule."
  2. U.S. Federal Reserve Economic Data (FRED) - Interest Rate Statistics.
  3. Society of Actuaries - "Retirement Risks and Strategies: Longevity Risk."
  4. Journal of Financial Planning, February 2017 - "Making Sense Out of Variable Spending Strategies for Retirees."