Personal Finance

If These 5 Things Happen, the 4% Rule in Retirement Might Be Doomed

Marc Guberti

Published: February 8, 2025 10:33 am

The 4% rule is a popular strategy that involves withdrawing 4% of your portfolio each year to cover living expenses. This strategy applies to retirees and can help you gauge how much money you need to save before leaving your career.

For instance, if you want to spend $10k/mo in retirement, that comes to $120k per year. Using the 4% rule, you would need a $3 million portfolio to withdraw $120k per year.

The idea behind the 4% rule is that your portfolio can replenish the 4% withdrawal each year. However, this strategy only works in theory and can present some challenges when you’re ready to implement it. These are some of the scenarios that can put pressure on the 4% rule’s viability.

A Prolonged Bear Market

The 4% rule depends on your portfolio staying at the same amount throughout your retirement. While it’s possible that your portfolio’s growth rate exceeds 4%, it’s also possible for your portfolio to lose value.

Corrections and prolonged bear markets happen, and they will impact how much you can take out of your portfolio. If you have to withdraw funds during a downturn, you will have fewer shares remaining. Retirees can mitigate this scenario by allocating their capital to low-volatility assets when they leave their careers.

Low Interest Rates Make It Less Feasible

Interest rate cuts can make it more difficult for retirees to achieve the 4% withdrawal rule if they rely on CDs and dividend stocks. Interest rate drops result in lower yields, and you may have to sell shares to fulfill the 4% benchmark.

Investing in growth assets can mitigate this risk, as these investments can grow by more than 4% each year. However, growth stocks and similar assets expose you to the risk of corrections and bear markets more than low-volatility assets.

Living Expenses Rise Faster Than Your Portfolio

Another key assumption with the 4% withdrawal rule is that your expenses stay the same. You can aim to keep your expenses at $10k per month, but your expenses will go up if products and services become more expensive.

The thing you buy for $120k this year may be worth $130k next year. You will either have to withdraw more than 4% of your portfolio or cut down on your expenses. 

Taxes Get in the Way

If you withdraw funds from a traditional retirement account, you will have to pay taxes on those withdrawals. That means a 4% withdrawal may not be enough to cover your expenses. 

Retirees should calculate their tax bill while anticipating how much they have to withdraw to cover expenses. The tax brackets change each year due to inflation, and it’s good to stay on top of them if you are relying on the 4% rule.

Unforeseen Personal Spending Spikes

Your personal expenditures can suddenly skyrocket without much warning. Health issues and natural disasters are some of the events that may require a significant withdrawal from your retirement account. 

While this significant withdrawal may be necessary at the moment, it also puts the 4% withdrawal rule into question for future years. Having fewer funds in your portfolio means you have to take out a higher percentage of funds to cover the same living expenses.

Is the 4% Rule Still Useful?

The 4% rule is still a useful metric, as it can help people set financial goals and get more realistic about how much they need to retire. Some people use a 3% rule instead of a 4% withdrawal rule to increase the likelihood of having more than enough.

The 4% rule can give you a good benchmark, but you shouldn’t stop working once you reach the benchmark. It’s good to have a net worth higher than the amount you designated for the 4% rule. However, it’s better to embark on your financial journey with clear targets in mind rather than not having any goals.