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The 4% Rule, Revisited

Written by Nickel - 4 Comments

In talking about drawing income from a retirement portfolio, I’ve often referred to the 4% rule. This rule holds that, if you withdraw an inflation-adjusted 4% from a balanced stock/bond portfolio, there would be a high likelihood of your money lasting 30 years.

However, the 4% rule dates back to academic research that was published in the late 1990s (1998 to be exact, though it was based on data through 1995) and the investing landscape — bond rates in particular — has changed dramatically in the intervening years.

According to a very recent study, the likelihood of failure increase dramatically as returns decline. In fact, when bond rates are calibrated to the current yield on TIPS while maintaining historical equity performance, the failure rate soars from 6% to 57%.

And even if we assume that bond rates will return to their historical range in 5 or 10 years, the failure rates (for people retiring right now) remain quite high at 18% and 32%, respectively (for a 50:50 allocation).

Said another way, given current conditions, 4% can no longer be treated as a “safe withdrawal rate.”

Solutions include reducing your (fixed) withdrawal (the authors found that a 2.5% withdrawal rate has a 90% chance of success under current conditions), adopting a variable rate that fluctuates depending on market performance, annuitizing a portion of your portfolio, and/or supplementing your nest egg with additional income.

Source: SSRN via Retirement Researcher Blog

Published on January 18th, 2013
Modified on February 4th, 2013 - 4 Comments
Filed under: Retirement, Saving & Investing

About the author: is the founder and editor-in-chief of this site. He's a thirty-something family man who has been writing about personal finance since 2005, and guess what? He's on Twitter!

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4 Responses to “The 4% Rule, Revisited”

  1. 1
    Robert Says:

    I would think a 2.5% withdrawal rate would easily be low enough to have your money last 30 years, unless inflation skyrockets. It is not difficult now to find companies paying 2.5 to 3.0 percent and that have raised dividends every year for more than 30 years. Plus, the rate of their dividend increases have been higher than inflation. Add some utility stocks that pay over 4%, and add some bond funds but keep the duration low, and then just be prudent going forward, and except for a catastrophic event, I would think with a 2.5% withdrawal rate, you may not even lose much principal going forward.

  2. 2
    getagrip Says:

    I would expect anyone who retires, whatever their definition of that is, to be re-evaluating things every year or two at a minimum. Rules of thumb are general and your individual position is specific.

    That said, seems to me that if their assumptions are correct, they’re predicting a double whammy, with rates so low, you’ll have a smaller nest egg combined with a smaller withdrawal rate, though they don’t say that explicitly.

  3. 3
    hasagrip Says:

    Actually the percentage that will work is the one you are stuck with in any case it’s on a individuals basis. 4% is one that someone is stuck with because they have no choice to live on less. I am in a position where 1% will easily get me by and may not have to take that much until I am 70 and will probably have to even be forced by age requirement. I was fortunate enough to have the wisdom and will power to save. Was not a high income earner just one frugal enough to do what I needed to do to retire with enough of a nestegg and retire at age 58. I still do not need to tap my nestegg. My wife is working for another year or so that will both give us the ability to collect SS at 62 and her pension gives us more than $75k to live on without tapping the nestegg. So any rule is out the window. It’s got to be based on the individuals circumstances. It’s a rule to use as a baseline, thats all.

  4. 4
    Richard Says:

    If hyperinflation strikes, there will be no rule of thumb to use. Hype-inflation will wipe out most nest eggs in a short period of time. Some will be forced to take out 20% or more in the first yer or two of such catastrophic economy anomalies. This is very likely to occur based on our government spending.

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