Is the Retirement 4% Rule Still Relevant? Here’s an Alternative Approach

When you start drawing money from your retirement savings, it’s worth looking closely at what fits your own portfolio and goals rather than relying only on broad rules of thumb.

A couple retiring at 65 with $1 million may believe they have enough to make it last, particularly if they follow a conservative approach such as the 4% withdrawal rule. Even so, that same couple could run into trouble if the withdrawal rate does not match their individual circumstances.

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Why some experts question the 4% rule

The 4% withdrawal rule is one of the best-known ways to tap retirement savings without depleting them too quickly. Under this method, retirees withdraw 4% of their savings in the first year of retirement and then increase that dollar amount with inflation each year after that.

Still, longer lifespans and persistent inflation have made the formula less reliable. Rising healthcare expenses can also put extra pressure on a retirement portfolio later in life. Critics argue that the rule is too inflexible because it assumes a stock-and-bond portfolio and a 30-year retirement. It also depends on historical market performance that may not repeat. Research from Charles Schwab suggests that stock and bond returns may be lower over the next decade than their historical averages.

Morningstar recently said that 3.9% is the “highest safe starting withdrawal rate for retirees seeking a consistent level of inflation-adjusted spending from year to year, assuming a 90% probability of having funds remaining at the end of an assumed 30-year retirement period.”

Why flexibility matters

Beyond the concerns that the 4% rule may no longer be the best fit, sticking to a single withdrawal rate without room to adjust can also hurt a portfolio during market volatility. Following a fixed 4% rule may be risky if the market falls early in retirement. If prices drop and withdrawals stay the same as they were during stronger markets, savings can disappear faster than expected.

Losses early on can reduce a portfolio’s ability to rebound from downturns, a problem known as sequence-of-returns risk. One way to help guard against this is to keep enough cash available so assets do not need to be sold during a market slump. Financial advisers often suggest retirees hold at least one to two years’ worth of expenses in cash.

How a dynamic withdrawal strategy works

The 4% rule is only a general guideline, and retirees can also use more flexible withdrawal methods.

One approach is to set guardrails that lower withdrawals during weaker economic periods. The same method can also allow for larger withdrawals during market rallies, helping retirees lock in gains. Those gains can then be moved into cash reserves to cover near-term spending and future needs, while the rest of the portfolio continues to stay invested in the stock market.