Why the 4% Rule (Probably) Isn't Broken

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Why the 4% Rule Probably Isn't Broken:
The 4% Rule is a rule of thumb popularized by retired financial adviser William Bengen and for the last 30 years it has been the standard bearer for retirement planning conversations. However, some have recently begun to call its validity into question given the current economic environment. Will the 4% rule hold up in an era of high valuations, high inflation, and low (but rising) interest rates?

Well nobody can truly predict the future, least of all me… but if history is anything to go by I would say that the 4% rule is (probably) going to be just fine. After all, it was built to handle situations just like the ones we face today, if not worse.

Let’s talk about why the 4% rule (probably) isn’t dead yet.

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[OnCashFlow]

Great video! I still believe the 4% rule is just fine, especially because the stated inflation rate usually does not affect most retirees like it does non-retirees! (i.e they drive less (less gas), they are more flexible with travel (hotels, rental cars, flights, etc.), they can shop for food on sale (more flexible when they shop), and so much more.

[bridgettetraveler]

2010 to 2020 was great 👍! Hopefully it will come back. We also may need to watch our spending a bit closer. One thing I learned yrs ago is keep your weight down so u won't have to clothes shop much! Take care of what GOD Bless us with & appreciate what we have. Remember the little bit we have could be taken away in a minute! Others may have less & learn to make ends meet!!!

[TheJAXguy]

The 4% rule is at best a "rule of thumb" for planning purposes. It may be fun to look at going into and in very early retirement. But once you hit your stride, you know what you will have to do. You will find very few retirees staying with such a content...

[Red]

@Next Level. Can you clarify the growth and the bond symbols from the study? I am thinking DIA or SPY. And, TLT or HYG. Thanks!

[luisoncpp]

There is a problem with the argument presented here: the 4% rule only accounts for retiring periods that started more than 30 years ago, but it's pretty possible that someone who retired in 2000 following the 4% rule will exhaust their money before 2030.

[howellwong]

Yes, I heard of the 4% rule and I have nothing against it. My rule is the 0% rule. My main goal was to retire when my pension and SS were enough to cover my expenses. They did and I am comfortably retired without touching my investments except for one RMD.

[amyx]

My life expectancy is 64. My tentatively planned FIRE age is 45. I can take out 5% from a savings account and be fine. The numbers aren’t the same for everyone. And that’s ok.

[neilcook]

4% is USA based with S&P portfolio, UK based should work on 3.1% according to ‘beyond the 4% rule’

[favjr]

Excellent video. You have to really question the motivations of people who tout that this "doesn't work". Beyond the uninformed, they all appear to be selling products or trying to attract clicks and eyeballs with overly pessimistic hysteria and poorly constructed analyses. (Yeah, Morningstar tops that list and was raked over the coals by Kitces, Bengen and others for it.)

Almost nobody in real life, and certainly no informed person, uses the assumptions of the 4% rule as the basis for drawing down on their portfolio in retirement. But its still a great conservative way to calculate how much one needs for the reasons stated in the video.

After that, you just manage to expenses, which will already account for your actual rate of inflation. If you are a sentient being, your actual rate of inflation should be less than reported figures just by doing things like having a fixed mortgage or paid off house. The spending smile is real and should be the base-line assumption in any analysis, NOT the unreal increasing expenses at the rate of CPI inflation.

The only thing really missing here is you failed to expand the portfolio discussion near the end to show that other simple portfolios beyond the standard 60/40 and total market (which you've discussed in other videos) have higher historical safe withdrawal rates and could be another form of "insurance." Then could have linked to other videos in your series -- wink, wink, nudge, nudge . . .

[jaket]

What is your definition of a "precedented" return from a diversified equity portfolio? The equity premium puzzle clearly states that past returns in the market in the past several decades are what is unprecedented. I'm more worried about actually precedented returns making the 4% rule irrelevant and not conservative enough.

[louisnguyen]

I need help understanding the withdrawal amount on inflation adjusted rate (please someone explain the video starting at 9:15 through 10:00). Please please please explain with a clear example (like I'm only 5 years old). THANK YOU FOR ANYONE WHO CAN SIMPLIFY The content creator's explanation.

[guitarguync]

If you were to keep your portfolio in growth oriented funds, but withdraw 4% of the acct. value for every given year (ex: the market drops 50%, your acct. balance drops to 500k, so you only withdraw 20k that year), could your acct. balance and annual withdrawl reliably increase over time? Ex: Your acct. grows to 3mil. over decades, so you can now withdraw 120k/year?

[davidfolts]

When you talk about terminal value of your portfolio using the four percent rule, is that number adjusted for the time value of money.? Thanks for the great content!

[zacharris]

I would love to hear your thoughts on a leveraged diversified portfolio, like Hedgefundie's excellent adventure or the leveraged Ray Dalio.

[ericjuli]

Something I think is very overlooked with the 4% rule is the effect of fees. The rule says you can use 4% each year, if you’re paying an advisor 1% AUM… now you’re living on 3% withdrawl

[joelcorley]

Actually the 4% rule fails about 1 out of every 20 historical scenarios. In fact that stock market crash at the start of the Great Depression is one of those scenarios. Had you retired using the 4% rule just before that crash, you would have run out of money in less than 30 years.

The one saving grace of the Great Depression was that inflation went negative, so less money would buy you more things. This is why retiring a little before the crash or a little after the crash would have been survivable. Indeed, it was the high inflation of the early 70s that made it at least as difficult to survive as the market losses from the Great Depression...

[alansach]

You can always withdraw zero. Your money is guaranteed to outlast you that way.

[TheFirstRealChewy]

We are currently trying to live on a fixed income until we get to retirement.

[trvorb]

The 4% rule doesn’t help million dollar seniors that need to go into nursing homes tho.

[ggr]

How should the 4% rule be adjusted for retirements lasting over 30 years?