The 4% Rule: Can It Still Work in Today’s Economy?

If you’ve done any retirement planning, you’ve probably come across the 4% rule— a guideline developed by financial planner William Bengen. He looked at decades of historical market data and concluded that if you withdrew 4% of your portfolio in the first year of retirement, then adjusted that amount annually for inflation, your money could last for over 30 years more. 

But that rule was developed in the 1990s.  With inflation, volatile markets, and interest rate shifts, many physicians and professionals are questioning whether the 4% rule still makes sense or if it needs to be adjusted.

Let’s break it down.

Pros and Cons of the 4% Rule in Today’s Economy

The original 4% rule was based on historical data, but today’s environment looks different. Here’s how it stacks up now:

Pros

• It creates a clear benchmark for those just starting to plan retirement income.

• It worked in past downturns, market crashes, and high inflation periods (like the 1970s), and it still held up over 30 years.

• It encourages sustainable withdrawals and keeps retirees from overspending too early.

Cons

• Low fixed-income returns. Until recently, interest rates were historically low, making it harder to earn steady income from bonds.

• Higher inflation eats away at purchasing power. When living costs rise faster than expected, you may need to withdraw more just to maintain your lifestyle, which can break the 4% model.

• Greater market volatility. Today’s economy is less predictable, and sharp early losses in retirement (known as sequence of returns risk) can shorten how long your portfolio lasts.
  

When the 4% Rule May Not Work

Some situations make the 4% rule less reliable:

• Early retirement - If you stop working at 55 or younger, your money needs to last longer than 30 years. In this case, a 3–3.5% rule may be safer.
  

• Conservative portfolios - If most of your portfolio is in low-yield bonds or cash, it might not grow fast enough to support 4% annual withdrawals.
  

• High initial market losses - If markets drop early in your retirement, and you keep withdrawing 4%, you could run out of money faster than expected.
  

• Irregular lifestyle costs - If your spending fluctuates significantly, due to healthcare needs, family support, or travel, a fixed withdrawal plan won’t give you the flexibility you need.
  

Smarter Retirement Alternatives to the 4% Rule

If the 4% rule feels too rigid, here are some options to build a more adaptable plan:

1. Dynamic withdrawals

Instead of a fixed amount, adjust your withdrawals based on market performance. Take less during down years, more during strong ones. It requires monitoring, but it better matches your income with market conditions.

2. Bucket strategy

Divide your assets into short-, mid-, and long-term “buckets.” Keep cash or short-term bonds for near-term expenses, and growth assets for the long run. This method helps protect against selling stocks during downturns.

3. Add alternative income

Supplement your retirement with income that doesn’t rely on the stock market. Real estate investing, for example, can provide monthly cash flow and tax advantages— something traditional portfolios often lack.

How to Personalize Your Withdrawal Rate

1. Estimate your retirement spending

Start by calculating how much you’ll need each year to maintain your lifestyle. Separate your expenses into essentials like housing, food, insurance, and healthcare and optional costs like travel, dining, and hobbies. This gives you a baseline target for how much income your portfolio needs to support.

2. Calculate your guaranteed income

Add up any reliable income sources you’ll have in retirement. This might include Social Security, pension payments, rental income, annuities, or part-time work. Subtract this amount from your total annual expenses to see how much you’ll need to withdraw from your investment portfolio each year.

3. Consider your time horizon and risk tolerance

If you’re retiring early, your money needs to last longer, which typically means you’ll want to withdraw less each year, closer to 3–3.5%. If you’re retiring later or have a higher tolerance for market swings, you might be able to stick with a 4% withdrawal rate.

4. Adjust for inflation

Your retirement plan should factor in rising costs over time. Even if your spending starts out stable, inflation, especially in healthcare, will increase your expenses. A good rule of thumb is to plan for a 2–3% annual increase in your withdrawals to maintain your buying power.

5. Review your plan annually

Your lifestyle, market conditions, and spending can all change. Make it a habit to revisit your withdrawal strategy once a year. Adjust your rate if needed, based on portfolio performance, changes in expenses, or any unexpected life events. 

The 4% rule still has value, but today’s environment demands more flexibility and personalized planning. Don’t rely on outdated assumptions. Take a proactive approach, one that considers inflation, interest rates, and your actual goals. 

If you’re looking to create more reliable income in retirement, especially outside the stock market, real estate investing may be a smart way to diversify. That’s what we’re doing to plan our retirement on our terms and take back control of our time. You can do it too.