Exploring a Classic Retirement Strategy—and What May Work Better Today
For decades, the 4% Rule has been the go-to guideline for retirees figuring out how much they can safely withdraw from their retirement savings each year. It’s simple, easy to remember, and rooted in decades of research.
But here’s the big question many retirees are asking today:
“Does the 4% Rule still work in today’s economy?”
We’re living in a world of longer retirements, higher inflation, low bond yields, and volatile markets. That means it may be time to rethink or revise the 4% Rule—and explore better, more flexible approaches to protecting your retirement nest egg.
Let’s dive into what the 4% Rule is, where it came from, why it might not work as well anymore, and what alternatives may serve today’s retirees better.
What Is the 4% Rule?
The 4% Rule was popularized by financial planner William Bengen in the 1990s. He studied historical market data and concluded that if retirees withdrew 4% of their retirement portfolio in the first year, and then adjusted that amount for inflation each year, they could safely fund a 30-year retirement without running out of money.
Here’s an example:
- You retire with $1 million
- You withdraw $40,000 in the first year
- Each year after, you increase that $40,000 by the rate of inflation
Bengen’s research assumed a 60/40 portfolio (60% stocks, 40% bonds) and was based on U.S. market performance going back to 1926.
The 4% Rule quickly became a widely accepted standard—especially because it was:
- Simple
- Predictable
- Easy to plan around
But times have changed.
Where the 4% Rule Falls Short Today
While the 4% Rule worked well for many retirees in the past, several new challenges have emerged in the modern economy:
❌ 1. Longer Life Expectancies
Retirements today are often 35 years or more, not 30. That extra time means your portfolio must last longer—and the risk of running out of money increases.
❌ 2. Low Bond Yields
In Bengen’s original analysis, bond yields were much higher than they are today. Many retirees today are lucky to get 3%–4% from bond investments, which puts pressure on the rest of the portfolio to perform.
❌ 3. Market Volatility
Today’s stock market is more volatile, with sharp drops and swift recoveries. A major bear market in your early retirement years (known as sequence-of-returns risk) can severely damage your long-term portfolio, even if average returns look good on paper.
❌ 4. Higher Inflation
Rising inflation reduces the purchasing power of your withdrawals. If you’re taking $40,000 a year, but your groceries, utilities, and healthcare are climbing 6% annually, that $40,000 doesn’t go as far.
❌ 5. One-Size-Fits-All Doesn’t Fit Everyone
The 4% Rule doesn’t account for different spending patterns, healthcare costs, or legacy goals. It’s rigid. And retirement, as we all know, is anything but rigid.
What Are Some Better Alternatives?
The good news is that retirees have more tools and strategies available than ever before. Let’s look at a few smarter, more flexible alternatives to the traditional 4% Rule.
✅ 1. The Dynamic Withdrawal Approach
Instead of sticking to a fixed percentage, dynamic withdrawal strategies adjust your withdrawals based on market performance and portfolio balance.
For example:
- Withdraw less during down years
- Withdraw more during strong market years
This approach helps protect your savings when the market is weak—and allows for a higher standard of living when it’s strong. Some retirees use a “guardrail” system (like the Guyton-Klinger method) to guide decisions on how much to spend each year.
✅ 2. The Bucket Strategy
Rather than one big investment pool, the Bucket Strategy divides your savings into three time-based “buckets”:
- Bucket 1 (Years 1–3): Cash and short-term bonds for immediate income
- Bucket 2 (Years 4–10): Medium-term bonds and dividend-paying stocks
- Bucket 3 (Years 11+): Growth-oriented stocks for long-term appreciation
This gives you peace of mind, knowing your near-term needs are covered even during a market drop. You draw from Bucket 1 during downturns instead of selling stocks at a loss.
✅ 3. Annuity-Based Income Floor
Creating a guaranteed income “floor” using annuities can be a powerful way to reduce stress and uncertainty in retirement.
For example:
- Use part of your portfolio to purchase a fixed or deferred annuity
- The annuity pays you a reliable monthly income for life
- You supplement that with withdrawals from the rest of your portfolio
This combination offers both guaranteed income and market growth potential, making it a strong option for risk-averse retirees.
✅ 4. Lower Initial Withdrawal Rate (e.g., 3.5%)
If you’re retiring early or want to be more conservative, consider starting with a 3.5% withdrawal rate instead of 4%. It offers a greater safety margin in uncertain times.
For instance, withdrawing $35,000 from a $1 million portfolio (instead of $40,000) increases your odds of the money lasting 30–35 years—even if markets underperform.
✅ 5. Higher-Income Alternatives
Today’s retirees can also boost their portfolio income using assets that provide higher yields than traditional bonds:
- REITs (Real Estate Investment Trusts)
- BDCs (Business Development Companies)
- MLPs (Master Limited Partnerships)
- Preferred Stocks
- Closed-End Funds (CEFs)
Some of these investments yield 6%–10% or more, allowing you to draw income without selling principal.
Note: These income strategies come with risks, so diversification and quality selection are key.
Real-Life Example: Linda and Her Flexible Withdrawal Plan
Linda, age 66, was preparing for retirement with a $900,000 portfolio. Rather than follow the 4% Rule blindly, she and her advisor used a hybrid strategy:
- She set up an annuity to cover 40% of her basic expenses
- She allocated 20% of her portfolio to cash and short-term bonds (Bucket 1)
- The remaining funds went into low-volatility dividend stocks and conservative income funds
Each year, they review the portfolio and adjust her withdrawals based on current conditions.
The result? Peace of mind. Linda doesn’t stress about inflation, rising interest rates, or short-term market dips—she’s built a plan that adapts with her life.
Final Thoughts: Should You Abandon the 4% Rule?
The 4% Rule isn’t wrong. It’s just outdated as a one-size-fits-all solution. In today’s economy, with increased uncertainty and evolving market dynamics, retirees need flexibility, adaptability, and more income-friendly options.
Whether you choose a bucket strategy, dynamic withdrawals, or income-focused investing, your goal remains the same:
Make your money last—and enjoy a retirement that feels safe, stable, and stress-free.
Disclaimer: This article is for informational and educational purposes only and should not be considered financial advice. Every retiree’s situation is unique. Please consult with a licensed financial advisor before making decisions about withdrawals, investments, or retirement income strategies. Investing involves risk, including the possible loss of principal. Past performance is not a guarantee of future results.