The 4% Rule for Retiring

There are many ways to look at life. And even more ways to live it. For those of us who intend to live well into our 80s and 90s, however, one thing is clear. You have to prepare for your retirement.

Unless you’ve amassed generational wealth earlier in your life, your options could be limited to the size of your savings and/or investments. In either case, the way you utilize your funds shall determine how long they’ll fund the lifestyle you’ve prepared for. But with proper withdrawal strategy, investing allows money efficiency that savings simply cannot. Thus – lasting you longer.

Here’s where the 4% retirement rule comes in. This is a rule of thumb which dictates that a person shall withdraw no more than 4% of their investment portfolio in the first year of retirement, with every subsequent withdrawal adjusting for inflation. The historical returns on balanced investment portfolios have allowed for this strategy.


The 4% rule emerged in the mid-1990s, after a financial advisor called William Bengen sought a more efficient withdrawal pattern for retirees. He used the stock and bond return data from the 1926 – 1976 period to conclude that a 4% withdrawal during the retirement year and an inflation-adjusted withdrawal every subsequent year would suffice in most if not every economic scenario.

During his study, Bengen concluded that there’s been no historical market downturn in that specific time period that could exhaust a retirement portfolio with a 4% withdrawal rate.

Is the 4% rule still feasible today?

While Bill Bengen originally stated that 4% annual withdrawals would be sustainable no matter what the situation, there are several reasons why it no longer is so.

First, take in consideration the historically high inflation rates. Since the beginning of 2022 the already spiking inflation rates of 2021 have now skyrocketed, reaching peaks many countries haven’t witnessed for ages. Inflation in the UK is already closing in on the 10% mark, while some of the EU has been hit even harder. While the inflation rate is expected to simmer down in the coming years, the impact of this rapid rise will echo for some time still.

Another important factor is the unstable political environment in Europe, Middle East, Africa…you name it! Several military conflicts have plagued this planet for years, leaving undesirable financial effects in their wake. When these occurrences involve large countries that are simultaneously the largest suppliers of commodities, the following economic fall out can be felt by everyone and everyone’s investment portfolio.

The data this rule is based on – while historically accurate – is clearly outdated. For example, during the reference period, bond returns were significantly higher than they are now. That alone can make the whole difference, especially during such market volatility as recently. With low bond returns, there has to be another asset to offset bad equity returns. Otherwise, a 4% withdrawal can quickly deplete a vulnerable portfolio.

So, what investment types fit best?

The 4% rule applies to a balanced portfolio, typically consisting of 50% stocks and 50% of bonds, even though Bengen himself used a 60/40 portfolio model in his research. The idea in this is quite clear – equity investments are the ‘breadwinners’ and bonds are your safeguard. And that has worked for decades. Until now. Market turmoil in combination with decreasing bond interest and high inflation has made short work of the traditional balanced portfolio, and investors around the globe in a way have to think outside the box. At least as far as balanced portfolios go.

This is why balanced portfolios should include other asset classes, too. For example, instead of having a 60/40 stock/bond portfolio, an investor could allocate 10-15% of their portfolios to real estate and gold, each. While each of these asset classes have solid return potential on their own, the idea here would be that both real estate and gold tend to do at least a little better during high inflation. That is an important characteristic for an asset to have, especially when stocks underperform at the same time as bonds have the lowest interest rates in years.

You can also use other asset classes to diversify and balance your portfolio. But, remember – the older you get, the safer your portfolio should be. While it’s impossible to be 100% safe from risks associated with investing, always remember to construct your portfolio in line with your risk tolerance and long term goals. Therefore, no – you probably shouldn’t buy cryptocurrencies or make other risky investments in your retirement.

The bottom-line

The 4% rule is a rigid rule to follow, and it should make your portfolio last at least 30 years if you do so. However, during times when the costs of living rise rapidly, 4% may be too short for some. And why even stick to a 4% rule if the historical returns on balanced portfolios exceed 8% annually?

Because of this, the 5% rule has once again re-emerged as the go-to rule of thumb of your retirement withdrawals. It is believed that a 5% initial withdrawal and inflation-adjusted withdrawals in the following years can still last you a long time, while at the same time allowing you to maintain a higher level of living.

Unfortunately, the 5% rule depends on the market doing well even more than the 4% rule does. In order, this makes the 5% rule less safe for a sustainable retirement portfolio.

Nevertheless, if you maintain a good portfolio balance and stick to your withdrawal plan without slipping up, the 4% rule should provide you a steady, inflation-adjustable source of income in your retirement. It might not be the most effective solution, especially if you incur  large, unexpected expenses that deplete your portfolio. However, if it’s not your only source of income during retirement (pension, social security), it can definitely bolster your level of life.