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Why the 4% Retirement Rule Is Outdated

For years, the 4% rule has been the golden staple that all financial advisors recommend that retirees follow. However, we will discuss why the 4% rule is outdated. Instead of using the 4% rule, we will explain what you can do to live your best retirement life without running out of funds.

Before I explain why the 4% rule is outdated, I think it’s best to explain what this rule is, just in case you need a refresher.

What Is the 4% Rule?

The 4% rule claims that retirees can withdraw 4% of their retirement savings every year throughout their retirement and never run out of money.

It was originally introduced in 1994 by a financial planner named William Bengen. He used historical market returns to determine a withdrawal rate that would sustain a 50% stocks and 50% bonds retirement portfolio for 30 years.

The #1 thing you want to avoid in retirement is using all your retirement funds. For the longest time, this 4% rule was the staple for how retirees could withdraw money from their portfolio every year and avoid using up all their funds. However, new research shows that this may not be the case.

Why Is the 4% Rule Outdated?

Interest Rates on the Decline

One of the biggest reasons why many retirees should consider not using the 4% rule is because interest rates are at an all-time low.

According to CNBC, interest rates on U.S. treasury bonds range from 4%-5%. However, back in the 80s and 90s, bond yields were at least double digits.

Check this out:


As you can see from this graph, on September 28th, 1981, the interest rate was 15.41%. Between 1979 and 1985, interest rates were always in double digits.

A recent study found that a 65-year-old couple could only withdraw 2.26% of their retirement savings per year without using up all their retirement funds.

Historically, bonds and other debt instruments issued by the U.S. Treasury have always been considered extremely safe and profitable.

While U.S. Treasury bonds are still safe investments, they are now less profitable than other riskier investments. This leaves many Americans having to choose between higher-yield risky investments or lower-yield safe investments.

Risky Investments

Because Americans are not getting favorable returns on safe investments, they are now taking bigger investing risks.

If a retiree receives a poor investment return during retirement, their portfolio could deteriorate significantly. Moreover, it might be difficult for the retiree to recover the money that was lost on their investment.

The 4% rule was made assuming that people were investing in safe, high-yield bonds that were returning consistently positive ROIs. But that is no longer the case. Many investors are now at risk of losing money rather than getting a positive ROI because they seek riskier investment opportunities.

The Hidden Price of Good Healthcare

Thanks to our advancements in health care and overall better standard of living, people are living much longer than their predecessors.

PLUS, thanks to the Financial Independence Retire Early (FIRE) movement, people are retiring earlier than their parents and grandparents.

Due to these factors, many Americans are at risk of outliving their retirement savings. Instead of saving for just 30 years, which is what the 4% rule is based on, many retirees now have to save for 40 to 50 years of retirement.

Inflation on the Rise

In February of 2023, a study was done by the financial advice company SmartAsset, which acknowledges that even high-earners are struggling to build wealth, and some were even living paycheck to paycheck.

In December 2022, 51% of people who earn more than $100,000 reported living paycheck to paycheck being unable to invest and save for retirement.

Not only that, but Healthcare and long-term care expenses have risen substantially faster over the years, wiping out many retirement savings in the process.

What Can I Do to Prepare for Retirement?

Rather than using the 4% rule, there are other strategies you can use to prepare for a profitable and smooth-sailing retirement.

Find a Tax Strategist

No matter how much money you have saved up for retirement, Uncle Sam will want a piece of the pie. The 4% rule doesn’t account for rising tax rates that could end up eating up how much money you have available to use for retirement.

A professional tax strategist can help you create a tax plan to help you reduce how much you pay in taxes going into retirement.

Build Your Revenue Arsenal

Social Security, Pensions, Annuities, and other guaranteed income can help you pay for all your expenses without dipping into your retirement portfolio. The more you can contribute to your social security, the better off you will be in the future.

Use Flexible Withdraw Strategies

New strategies are emerging that you can use to safely withdraw from savings without the risk of running out of money in the future. One of these new strategies is called the “guardrails approach.” This approach is designed to account for changes in the value of your portfolio. Your withdrawal rate will decrease when the market is doing poorly or increase when it is doing well. So, being flexible with your withdrawal rate is the name of the game. 


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