The 4% Rule: A Smart Starting Point for Retirement

Hoss Harasi
Apr 15
5 min read

Retirement planning has never been more essential—yet it’s also become increasingly complex. With recent inflation challenges and economic uncertainties, one of the biggest concerns facing retirees is the possibility of outliving their savings.

That fear is valid. After all, we can’t control when the next market dip or economic downturn will happen. But what we can control is how we respond. Staying disciplined and sticking to a sound financial plan that adjusts with changing conditions is one of the most effective ways to reduce retirement risk and maintain peace of mind.

So, how do retirees protect their lifestyle in unpredictable times? It starts with understanding two key concepts in retirement planning: the 4% Rule and sequence of returns risk.

What Is the 4% Rule?

The 4% Rule answers a basic but important question: How much can I safely withdraw from my retirement savings each year?

Introduced by financial planner William Bengen, this guideline suggests that retirees can withdraw 4% of their portfolio annually (adjusted for inflation) and still have a strong chance of not running out of money over a 30-year retirement. It’s often referred to as the “SAFEMAX” rate—meaning the maximum safe withdrawal rate based on historical data.

How Reliable Is the 4% Rule Today?

Looking at historical data from 60/40 stock/bond portfolios, only once in the 1960s did the maximum withdrawal rate dip to 4%. In fact, the average safe withdrawal rate has been closer to 6.9% across different market periods.

That said, averages can be misleading. Market performance varies widely from year to year, and withdrawal strategies must be flexible enough to adapt to these shifts. The 4% Rule can serve as a helpful benchmark, but it isn’t a one-size-fits-all solution.

Here are a few important caveats to consider:

Consistency is key.Investors who panic and sell during downturns often miss the recovery, damaging their long-term portfolio growth. Retirement success depends as much on behavior as it does on markets.
Every investor is different.A 60/40 portfolio might be too aggressive for some retirees—especially those in later stages of retirement. Risk tolerance, income needs, and overall goals should shape your strategy.

Understanding the Sequence of Returns Risk

One major flaw of “simple” rules like the 4% Rule is that they don’t fully address sequence of returns risk—the risk that poor market performance early in retirement could harm your long-term financial health.

If you start retirement in a bear market and begin making withdrawals while investments are down, you may lock in losses that are hard to recover from. On the flip side, beginning retirement during a bull market allows your portfolio to grow more quickly, giving it a stronger cushion for future downturns.

Unfortunately, we don’t get to choose the market conditions when we retire. That’s why it’s so important to stay flexible and build a plan that adjusts to what the market throws your way.

Longevity Risk: Planning for a Longer Life

Another issue with general rules of thumb is that they don’t account for rising life expectancies. According to the Social Security Administration, today’s 40-year-old men and women can expect to live to 79 and 83, respectively. But people in the 90th percentile could live into their 90s.

For those already age 65, men are expected to live to 83 and women to 86, on average. But again, many will live far beyond that. That extra decade (or more) makes a big difference when it comes to retirement planning.

This is known as longevity risk—the risk of outliving your assets. It’s a critical concern because running out of money is typically more damaging than leaving too much behind. That’s why life expectancy must be factored into every retirement strategy, and another reason why working with a professional advisor can make all the difference.

Bottom Line

The 4% Rule can be a solid starting point, but it’s not a replacement for a personalized, flexible financial plan. Understanding your own goals, adjusting for changing market conditions, and planning for a potentially longer retirement all require expert guidance.

Financial Plan Providers LLC has over 15 years of experience helping individuals and families create comprehensive, adaptable financial plans. If you’re unsure whether your retirement strategy is built to last—or if you simply want to explore your options—we’d be honored to help.

Schedule a conversation with one of our seasoned advisors today and take the first step toward a confident retirement.

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