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The 4% Retirement Spending Rule: Is It Still Relevant?

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The 4% retirement spending rule was developed 20 years ago by William P. Bengen, a financial planner who published his results in the Journal of Financial Planning. Essentially, the 4% rule says that retirees who begin with spending 4% of their portfolio and increase their spending only for inflation would have a high probability of success for a 30-year time horizon, assuming a moderate allocation of 50% stocks (S&P 500 Index) and 50% bonds (intermediate Treasury bonds). A decade later, he updated his research to incorporate small-cap stocks which raised the sustainable withdrawal rate to between 4.5 and 5.0%. In both cases, Bengen’s numbers were based on historical rolling period returns data.

As we explained in this article, one of the things we don’t like about the 4% rule is its extreme inflexibility. The idea that a retiree will spend exactly the same amount twenty-five years after retirement as he spent in his first year of retirement (adjusting only for inflation) is difficult to justify. Among our own retired clients, we have seen withdrawal amounts that were impacted by both major life events and major portfolio events such as the 2008-9 bear market.

At the opposite extreme of the 4% rule is the RMD (required minimum distribution) rule used by the IRS to determine required withdrawals from IRA accounts. This method takes out a percentage of the portfolio that increases with age, and is designed to deplete the portfolio at the maximum life expectancy. The table below shows the required percentage withdrawals at several different ages:

While the RMD approach has a low risk of asset depletion, it can engender a high level of volatility in annual spending, which many retirees would find unacceptable. In August of 2012, Vanguard Research published a whitepaper1 titled “Revisiting the 4% spending rule” which discussed the results of tests they ran using forward-looking returns rather than historical returns. One reason that they used this approach is that yields for both bonds and equities are historically low today.  Vanguard found that the factor with the biggest impact on the sustainable withdrawal rate is the length of the retirement-planning horizon. Vanguard agrees with Bengen that 30-years is a reasonable assumption.


The longevity table shows the probability that at least one spouse of a 65-year-old married couple will reach a given age:

Vanguard found that sustainable withdrawal rates can range from 3% of a portfolio (for conservative investors with long time horizons) to more than 9% (for more aggressive investors with  shorter time horizons)—all with an 85% probability of not crashing the portfolio. An important caveat is that investors must be willing to take a “total return” approach rather than reaching for yield. In Vanguard’s recent whitepaper2 on quantifying the value added by an advisor, this was included as one of the important functions of investment advisors, although its particular value was not quantified.

In answer to the question asked in the title of this article, our answer would be that while 4% (or 4.5-5.0%) may be a good starting point for many retirees, the ideal approach to determining withdrawals should be dynamic rather than static. This rules out both the 4% rule and the RMD rule. At least once a year, the retiree should run a retirement plan analyzer such as this one to determine a sustainable withdrawal level for the remainder of his or her life expectancy.  Doing this regularly will ensure that major changes in future life expectancy, future living expenses, and the value of retirement assets, are fully taken into account.

If you would like to learn more about how an IFA wealth advisor can assist you in producing a sustainable and dynamic retirement withdrawal strategy, please call us at 888-643-3133.


1Bruno, Maria A., Colleen M. Jaconetti, and Yan Zilbering, 2012. Revisiting the ‘4% Spending Rule’. Valley Forge, PA: The Vanguard Group.

2Kinniry, Francis M., Jr, Colleen M. Jaconetti, Michael A. DiJoseph, and Yan Zilbering, 2014. Putting a Value on Your Value: Quantifying Vanguard Advisor’s Alpha. Valley Forge, PA: The Vanguard Group.