The 4% rule seemed to be the closest thing retirement planning had to accepted science for decades. Your savings should last at least 30 years if you take out 4% of them in the first year and then adjust for inflation every year after that. Easy. tidy. comforting. Advisors used it as the focal point of whole client presentations. At dinner tables, retirees repeated it as if it were scripture. And for a while, it was effective enough that no one raised too many awkward questions.
That is now changing. Some of the same financial experts who supported the rule are gradually withdrawing from it without much fanfare. This is not because they are making drastic changes, but rather because they are hesitating, which may be more telling.
In an upcoming book, retired financial planner William Bengen—who first proposed the 4% withdrawal rate in the early 1990s—will revisit the concept. He has taken care to point out that it was never intended to be a law but rather a guideline. “The 4% rule isn’t really a rule; it’s a process,” he said. Compared to thirty years ago, when markets behaved differently and a portfolio of U.S. large-cap stocks and intermediate-term government bonds seemed like a reasonable stand-in for the entire investing universe, that distinction is more important today.
The rule might have always been more brittle than it seemed. Bengen’s model was developed using historical data that captured favorable conditions that are no longer present in the world that the majority of retirees are entering. Interest rates were close to zero for years. Even conservative portfolio assumptions were upset by the resurgence of inflation. A 30-year runway now sounds more like a minimum than a cushion because people are living longer. In the words of American College of Financial Services retirement income professor Wade Pfau, “The 4% rule is under more risk.” That’s a cautious way of saying that the math isn’t holding up as it used to.
Suze Orman hasn’t been as cautious. She has called on people to completely abandon the rule, claiming that strict withdrawal rates lead to a risky mismatch—taking money out when you don’t really need it and possibly running out of money during the years when expenses are at their highest. There is no neat inflation-adjustment schedule for health costs in your late seventies. A family emergency or a leaky roof don’t either. In ways that may seem comfortable on paper but uncomfortable in practice, the 4% rule smoothes over those realities.
Some advisors believe that the rule’s longevity is partly due to the fact that it provided a sense of stability for all parties involved. Customers seek assurance. A number that can be defended is what advisors want. Even when the underlying presumptions were subtly changing, the 4% rule provided both. It’s interesting to watch how the financial planning community is currently dealing with that; there isn’t a single breakthrough or press conference where it is declared dead. Just a slow trend toward terms like “individualized glide paths” and “dynamic withdrawal strategies.”
Explaining what takes its place at a dinner table is more difficult. It takes more than one sentence to explain ideas like asset-class tilting and rising equity glide paths. This is likely the reason the change is occurring more gradually in advisor offices than in the news. The majority of customers can still identify the number. It’s still widely believed.
Depending on when you intend to retire, how long you anticipate living, and how open your advisor is about a formula that has subtly outlived its original context, that belief may or may not be reassuring.
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