Personal Finance

Why the 4% Rule Is Dead to Me

Maurie Backman

Published: January 14, 2025 9:02 am

Let me be honest. There are things I’d rather do with my money than save a large portion in a retirement account. I’d much prefer to spend every penny of my salary on things like a nicer house, a car whose doors won’t give me trouble during the winter, and a vacation I don’t have to reach in economy seating.

But the reason I push myself to save well for retirement is I know I’ll need the money. Social Security isn’t going to provide nearly enough income for me to live comfortably. And it’s not because I’m spoiled — it’s because, at best, I can expect those benefits to replace about 40% of my pre-retirement wages. So my personal savings will need to pick up the slack, and I intend to manage my nest egg wisely. But I don’t intend to use the 4% rule to manage my savings, and you may not want to, either.

Why I have a problem with the 4% rule

The 4% rule was established in the 1990s by Bill Bengen, and it stated that if you were to withdraw 4% of your savings your first year of retirement and then adjust future withdrawals for inflation, your nest egg should last for 30 years. It’s not a bad theory. But I have some issues with it.

First, the 4% rule assumes that your investments are largely split equally between stocks and bonds. And for the record, I think that’s a pretty reasonable asset mix for retirement.

But I’m not confident that bonds will pay enough to allow for a withdrawal rate that high in the future. The bond yields savers enjoyed in the 1990s aren’t the same yields future savers are likely to benefit from.

Of course, you might think the simple solution there is to go heavier on the stock side. And sure, you could consider doing that if you have a higher appetite for risk. But the downside is that your portfolio will be subject to more volatility — not the sort of thing you want at a time when you’re living off of it.

Another issue I have with the 4% rule is that it’s designed to prevent your savings from running out over a 30-year period. But not everyone has a 30-year retirement. For folks who retire early, a 4% withdrawal rate may be too aggressive. For those who retire late, there’s probably leeway to go higher.

Finally, the 4% rule assumes that your expenses will largely remain the same throughout retirement. But how many people have the same energy level at 87 that they do at 67? I’d like to be able to spend more of my savings during the earlier stages of retirement, and the 4% rule isn’t particularly conducive to that.

My personal approach to managing my savings

I’m nowhere close to retirement, so I’m not yet at a point where I’m looking to tap my nest egg. But my plan is to keep things fluid depending on my retirement age, my investment mix, and my needs and wants.

I also intend to work with a financial advisor to manage my savings during retirement and establish a withdrawal rate that makes sense for me. But I would expect that rate to shift over time, whereas with the 4% rule, you’re sticking to the same rate throughout retirement aside from inflation-related adjustments.

I’ve always been someone who’s a little skittish about making commitments (don’t tell my husband). I don’t see myself wanting to commit to a single withdrawal rate throughout retirement. And you should know that you don’t have to, either.

It may be a good idea to use the 4% rule as a starting point for managing your nest egg. Beyond that, don’t be afraid to personalize your approach to your retirement finances rather than follow a well-intentioned but flawed strategy that’s supposed to work for the masses.