The 4% Rule Is a Starting Point—Not a Retirement Plan
In 1994, William Bengen created the 4% rule. It states that withdrawing 4% of a portfolio annually, adjusted for inflation, will safely fund a 30-year retirement without running out of money. It’s a great rule and it does work, but the simplicity of the rule has some issues when considering that people don’t follow a neat and tidy path for decades and neither do the markets or the economy.
Ironically, there are many times that using the 4% rule leaves more money at death than it started with. That may not sound like a bad thing, but it means that the people missed out on spending more, giving more, or just living more in their retirement years. When people really dig deep into what’s important to them, most choose seeing the fruits of their labor or creating experiences while they are alive to see them over leaving a large bag of money in the form of an inheritance.
The 4% rule is a great starting point, but if the goal is to get the most out of life while living it’s probably time to reconsider the broad application of the rule.
If someone wants to leave the largest inheritance possible, then I suppose they should use something like the 1% rule. We aren’t talking about that objective.
The Pitfalls of the 4% Rule
Here are some key limitations:
Sequence of Returns Risk
Poor investment returns early in retirement can irreparably damage a portfolio, even if long-term averages are met. More shares are required to be sold to reach the spending target, so fewer shares remain during the period of market recovery.Ignores Market & Economic Conditions
The 4% rule was built on historical U.S. data during periods of higher bond yields and lower equity valuations—conditions that may not align with today’s environment. The issue is the rule does not adapt if the key assumptions were wrong. It would fly the plane right into the side of the mountain instead of pulling up.One-Size-Fits-All
It assumes a fixed time horizon, static spending needs, and doesn’t account for variability in income sources, healthcare costs, or lifestyle shifts. Problems arise if you live too long, decide you want a second home or to downsize, want to go out to dinner 5 nights a week instead of cooking at home. It’s locked.Lack of Flexibility
It doesn’t allow for spending adjustments based on portfolio performance or personal circumstances. If the market rips during the early period of your retirement, don’t even think about buying that new car a few years earlier. Grandkid needs a few bucks to start a business? Tough. It has turned the portfolio into an income stream that feels like Social Security.
A Different Way: Dynamic Withdrawal Strategies
If your goal is to maximize retirement spending while managing risk, a dynamic withdrawal approach offers far greater flexibility and control. These strategies adjust your withdrawals based on portfolio performance and other real-life variables, improving the odds of success—especially when legacy is not the primary goal.
Here are a few alternatives:
Strategy | Quick Summary |
Guardrails (Guyton-Klinger Rules) | Sets upper/lower portfolio bands. Withdrawals are adjusted if performance falls outside the guardrails. |
Percent of Portfolio | Withdraw a fixed percentage of your portfolio each year. Spending adjusts with market changes. |
Floor and Ceiling | Sets a minimum and maximum withdrawal band to avoid drastic spending changes. |
Monte Carlo-Informed Withdrawals | Uses probability models to guide spending levels based on likelihood of success. |
Bucket Strategy | Divides assets into short-term, medium-term, and long-term buckets to time withdrawals based on market timing and income needs. |
Why You’d Consider Dynamic Planning
A dynamic approach offers some key benefits:
Maximizes lifestyle spending
Adapts to market conditions
Reduces risk of portfolio depletion
Provides peace of mind—even in uncertain markets
For clients who aren’t focused on leaving a large legacy, dynamic strategies help you spend more confidently—knowing your plan is designed to evolve with both your portfolio and your life.
Retirement isn’t static which is why we advocate that your withdrawal strategy shouldn’t be either. My preference is the probability based Monte Carlo approach. This provides a continual stress test of the spending level and in future decision making.
As always – Think. Discuss. Go Forward!
-Ryan
