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David Blanchett

Retirement Planning > Spending in Retirement

Is the 4% Rule Too Safe?

By David Blanchett

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What You Need to Know

  • Our research finds 61% of financial advisors most commonly use 4% as the withdrawal rate for clients.
  • While client situations vary and rules of thumb are not optimal, I think 5% is a more realistic starting point for the average retiree..
  • Here is a new approach based on how willing and able a client is to adjust their spending.

Nearly every financial advisor has heard of the “4% Rule,” which is based on research by Bill Bengen published in the Journal of Financial Planning in 1994. 

This body of research suggests that a 65-year-old couple could take out 4% of their savings at retirement and safely increase that initial amount by the rate of inflation for 30 years. In a recent survey, we found that 61% of financial advisors most commonly use 4% as the withdrawal rate for clients, so it’s safe to say it’s a number that still resonates with advisors.

The most advisable initial portfolio withdrawal rate for most retirees may not be 8%, but advisors should be aware that 4% may also be too safe given some of the nuances around retirement planning.

While a recommended spending level will vary by household, I believe we need to update our general baselines around retirement spending levels, given that these rules are based on modeling tools that do not accurately capture retiree preferences and desires.

There are three primary downfalls to retirement spending rules of thumb:  

  • They ignore other income streams: Many Americans receive some type of guaranteed lifetime pension benefit, such as Social Security, which provides a minimum standard of living. This means a retiree’s portfolio is generating income in addition to these guaranteed sources, thereby providing a safety net that might allow for a different portfolio withdrawal rate. 
  • They don’t acknowledge spending flexibility: Traditional models commonly don’t include the desire or ability to adjust spending during retirement, since withdrawals are assumed to change only by the rate of inflation. Retirees have an ability to adjust spending based on real-life needs and circumstances, which can significantly affect spending rates. 
  • They inadequately evaluate outcomes: Bengen’s research and most financial planning tools today determine safe withdrawal rates by focusing on whether the goal is accomplished in its entirety and ignore the magnitude of failure using a metric commonly referred to as the “probability of success.” A better approach is to consider the total amount of the goal accomplished each year.

In past research, I’ve found that using more realistic outcome metrics like goal completion, and incorporating things like retirement spending flexibility, results in higher optimal spending levels. Based on this research, I think 5% is a more realistic starting point for the average retiree assuming a 30-year retirement period, but the actual target depends on a host of factors.

Our latest research introduces the concept of “guided spending rates” where the spending level varies based on an individual’s flexibility associated with the goal, for retirement periods from 10 to 40 years.

The adjustment from 4% to 5% might not sound like much, but it’s a 25% increase in potential portfolio income and could be viewed as additional discretionary funding that retirees could use earlier in retirement, when they are more likely to be active.

The right withdrawal rate is all about finding balance, and I think 4% is probably too conservative given a more holistic perspective and more realistic ways to quantify outcomes. 

David Blanchett

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