For years, the classic “4% rule” has been a go-to guideline for retirees: withdraw 4% of your portfolio in your first year of retirement, then increase that amount annually to keep pace with inflation. Under this approach, a $1 million nest egg would generate a $40,000 first-year withdrawal, followed by $41,200 the next year if inflation ran at 3%. This formula originated from research by financial planner William Bengen, who showed that this strategy historically supported a 30-year retirement for a balanced stock-and-bond portfolio.
Its simplicity is what made the rule so appealing. But the financial landscape has changed, and many planners now question whether the 4% rule fits today’s realities. The original calculations assumed a 50/50 stock-bond allocation, steady inflation, and relatively predictable expenses—assumptions that don’t always hold up anymore.
Why the 4% Rule Is Under Pressure
Market volatility and sequence-of-returns risk: If you experience market downturns early in retirement, withdrawing a fixed 4% can permanently reduce your portfolio’s long-term sustainability.
Healthcare and long-term care costs: Medical costs are rising much faster than general inflation. Major health events, or the need for long-term care, can quickly upend a withdrawal strategy built around the 4% guideline.
Longer retirements: More retirees are living well beyond 30 years after leaving the workforce. A strategy tailored to a 30-year horizon may fall short for someone who needs income for 35 – 40 years.
More complex income sources: Between pensions, Social Security, and changing spending patterns, retirees often don’t withdraw in a straight line. The rigid structure of the 4% rule may not reflect real-life spending.
What This Means for You
The 4% rule is still a helpful baseline, but it works best as a starting point, not a one-size-fits-all prescription. Many experts now suggest slightly lower or more flexible withdrawal rates, often in the 3.5% – 4% range, or adjusting withdrawals based on market conditions and personal needs.
Your ideal strategy should factor in your age at retirement, FERS pension income, Social Security, healthcare expectations, investment mix, and risk tolerance. Partnering with a Federal Retirement Consultant (FRC®) can help you adapt the 4% rule into a personalized plan that protects your savings and supports the retirement lifestyle you’re planning for.
