Why the 4% Rule Might Be Failing You—and What to Do Instead

 

The 4% Rule Is Old News—What to Use Instead for Safe Withdrawals in Retirement

If retirement planning had a Mount Rushmore of rules, the 4% Rule would be carved right next to compound interest, don’t put all your eggs in one basket, and “buy low, sell high” (which most of us ignore and do exactly backward). But over the past decade, especially in the wake of economic shifts, low-interest rates, and longer life spans, the 4% Rule has started to feel more like a rusty weathervane than a reliable compass. So if you’re banking on the 4% Rule to glide you into a carefree retirement, you might want to buckle up—and consider a more modern map.

The 4% Rule was born from the work of financial advisor William Bengen in the 1990s. It suggests that if you withdraw 4% of your retirement savings in the first year of retirement and adjust for inflation each year, your money should last 30 years. It was a groundbreaking concept at the time—offering a simple, one-size-fits-most strategy to navigate the foggy waters of financial independence. The only problem? Retirement planning in 2025 is nothing like it was in 1994. Back then, you could still rent a movie at Blockbuster, gas cost $1.11 a gallon, and nobody had to think about the financial implications of paying for cloud storage.

Here’s where the 4% Rule starts to crack under pressure: longevity risk, market volatility, low bond yields, and increasingly expensive retirements. Americans today are living longer and spending more in retirement—on healthcare, travel, grandkids, and all the hobbies they couldn’t afford time for during their working years. That’s great for your lifestyle, but not so great for your portfolio if it’s trying to stretch over 35 or even 40 years instead of 30.

Add to that the fact that bond yields—the backbone of “safe” retirement income—have been scraping the floor in recent years. When Bengen created his rule, bonds yielded 5% to 7%. Today? You’re lucky to see 3% on a good day. That alone undermines the foundation the 4% Rule was built upon.

Market volatility adds another twist. If you retire into a bear market—something researchers call “sequence of returns risk”—and withdraw 4% during those early years of loss, you might never recover. It’s like trying to fill a bathtub with the drain open. And don’t even get us started on inflation. Remember when eggs cost $1.39 a dozen? Yeah, us neither. If your spending needs rise faster than your portfolio’s returns, your carefully calculated withdrawal rate might become a slow bleed into financial stress.

So if the 4% Rule is looking a little shaky, what’s a modern retiree or soon-to-be retiree to do? Fortunately, there are a few more dynamic, flexible, and dare we say, reality-friendly strategies available today. One of the most widely embraced is the dynamic withdrawal strategy, which sounds like a fitness routine but is actually a smarter, more adaptive way to draw down your savings. With this approach, instead of taking out a fixed amount each year, you adjust your withdrawals based on how your portfolio performs. In a great year? Maybe you take out a little more and splurge on that cruise. In a bad year? You pull back a bit, skip the cruise, and instead practice the art of hammock-based meditation in your backyard.

A great example of this comes from Jonathan Guyton and William Klinger’s decision rules, which allow for annual spending adjustments based on market performance. Their research has shown that you can potentially withdraw more than 4% safely—up to 5% or more—if you’re willing to reduce spending in down years. You can read more about that approach here: https://www.kitces.com/blog/decision-rules-to-create-sustainable-retirement-income-guyton-klinger/

Another increasingly popular approach is the Guardrails Method, which creates upper and lower limits on your withdrawal rate based on your portfolio’s performance. You stay within a “guardrail” of sustainable spending, making minor corrections as the market moves. This allows you to enjoy the good years without falling off a cliff in the bad ones. The financial planning software RightCapital explains how this works in practice: https://www.rightcapital.com/blog/guardrails-a-better-way-to-think-about-safe-withdrawal-rates

For the ultra-cautious—or those with a high-fiber diet of anxiety—there’s also the floor and ceiling strategy. This involves creating a spending floor that covers your essential needs with guaranteed income sources like Social Security, pensions, or annuities. Your discretionary spending then comes from your investments. This approach offers peace of mind because no matter what the market does, you won’t be choosing between groceries and gas. For more on this hybrid method, check out Morningstar’s overview here: https://www.morningstar.com/retirement/floor-and-ceiling-strategy

And speaking of annuities (no, don’t run away just yet), while they’ve long had a reputation as being expensive or confusing, the newer crop of low-fee immediate annuities can actually provide valuable longevity insurance. You trade a portion of your portfolio for a guaranteed stream of income, which takes the pressure off your remaining investments. You’re essentially outsourcing your stress to an insurance company—and in retirement, that’s a trade most people are willing to make.

But let’s be real: no single strategy is perfect, and none of them come with a magic wand. The key to modern withdrawal strategies is flexibility. You have to be willing to pivot. Think of it less like rigid budgeting and more like yoga: some stretching, a little balance, and a whole lot of breathing through the unexpected.

Incorporating tax efficiency is another game-changer. Where your money comes from matters almost as much as how much you take. Drawing strategically from tax-deferred, taxable, and Roth accounts can help you minimize taxes and maximize income over the long run. For example, in low-income years, it might make sense to convert some traditional IRA funds into a Roth IRA to reduce future tax burdens. The Mad Fientist covers this topic in depth with a great guide here: https://www.madfientist.com/tax-avoidance/

Of course, no withdrawal strategy discussion is complete without touching on the role of flexible spending. Your expenses in retirement will not be a smooth, predictable upward curve. You’ll have splurges, emergencies, medical bills, and the inevitable bathroom remodel that starts with a leaky faucet and ends with new tile, a rainfall showerhead, and three months of “we should’ve just lived with the drip.” Plan for the variability. Your budget will need to breathe just as much as your portfolio does.

In practical terms, planning to withdraw somewhere between 3% and 4%—but adjusting based on actual conditions—is a safer bet. Start conservative, but don’t lock yourself into a static plan that doesn’t respond to real life. In the early years of retirement, consider drawing less to allow for growth and recovery, then increase your withdrawals later when portfolio risk is reduced. Think of it like warming up before a workout—start slow, then hit your stride.

The bottom line? The 4% Rule had its time in the sun, but in today’s complex retirement landscape, you need more than a single number to guide you. Consider blending multiple strategies, reassess your withdrawal plan annually, and work with a fee-only financial advisor who understands the nuances of modern retirement planning. Most importantly, give yourself grace and room to adjust. The beauty of retirement isn't just about the freedom to spend—it’s the freedom to think differently about money.

Now, before you go off Googling “how to live on 3.5% a year and still afford wine,” remember this: retirement isn’t about deprivation. It’s about sustainability. A well-designed withdrawal strategy isn’t a prison; it’s a parachute. You’ve worked hard, saved diligently, and now it’s your job to make sure that money lasts as long as you do—preferably with a few laughs, some good travel stories, and maybe even a little guilt-free spoiling of the grandkids along the way.

For a deep dive into modern withdrawal strategies, including modeling scenarios, check out this Retirement Researcher article from Wade Pfau, one of the leading voices in retirement planning: https://retirementresearcher.com

And if you’re still wondering if it’s okay to buy that hot tub in year two of retirement? Well, only if you’re using dynamic withdrawals and your portfolio says you can. Otherwise, get yourself a garden hose and a kiddie pool. Same vibes, way less financial stress.