The NEW 4% Rule

For decades, one number has dominated retirement planning discussions: 4%.

The traditional 4% rule says that a retiree can withdraw 4% of their investment portfolio in the first year of retirement, then increase that dollar amount with inflation each year, with the goal of making the money last for roughly 30 years.

It is a useful rule of thumb. It is simple, memorable and provides a quick way to estimate how much money someone may need to retire.

But there is a problem.

Your retirement is not a rule of thumb.

Your retirement may last 20 years, 30 years, 40 years or longer. You may have Social Security, CPP, OAS, GIS, an employer pension, rental income or other reliable income. Your spending may change as you age. Your portfolio may perform better or worse than expected. You may be willing to reduce discretionary spending during a market downturn.

And because of those differences, a rigid 4% withdrawal strategy can be either too aggressive or unnecessarily conservative.

The new way to think about the 4% rule is not as a rule at all.

It is a starting point for a much more personalized question:

How much can I reasonably spend from my portfolio while maintaining an acceptable probability of success?

What Is the 4% Rule?

The traditional 4% rule originated with research by William Bengen in the 1990s. The basic concept was straightforward.

Imagine you retire with a $1 million investment portfolio.

Under the traditional approach, you would withdraw $40,000 during your first year of retirement.

In the following year, you would increase that dollar amount to account for inflation. You would continue increasing the withdrawal for inflation over the retirement period.

The objective was not to spend exactly 4% of the portfolio every year. Instead, the starting withdrawal was 4% of the initial portfolio, with the subsequent dollar withdrawals adjusted for inflation.

This distinction is important.

If your portfolio grows substantially, you do not simply withdraw 4% of the new balance under the traditional rule. You continue with the inflation- adjusted dollar amount.

That makes the strategy relatively predictable for the retiree, but it also creates one of its biggest weaknesses.

The 4% Rule Was Never a Personalized Retirement Plan

A rule that uses only one number cannot account for everything that makes your retirement different from someone else's.

Consider two people who each have $1 million invested.

Person A retires at age 60 and expects to live to age 100. Almost all of their retirement income must come from their portfolio.

Person B retires at age 70, receives a substantial government pension and employer pension, owns their home outright and expects to need their portfolio primarily for discretionary spending.

Applying exactly the same 4% withdrawal rule to both people does not make much sense.

Their retirement risks are completely different.

The amount you can safely withdraw depends on much more than the size of your investment portfolio.

Why the 4% Rule Can Be Too Conservative

This is where the discussion gets interesting.

The 4% rule is often presented as though withdrawing less is always safer and withdrawing more is always dangerous. The reality is considerably more nuanced.

Modern retirement research has shown that rigid withdrawal strategies can result in retirees spending less than they potentially could have spent.

Morningstar's retirement research has specifically pointed out that its conservative safe-withdrawal calculations assume conditions that are intentionally cautious. Its research has also shown that retirees with shorter expected time horizons can support higher withdrawal rates than someone beginning a 30-year retirement.

Morningstar has also described the 4% guideline as a useful starting point but a blunt instrument. A rigid strategy that starts with a low withdrawal rate and never meaningfully adjusts spending can lead to significant underspending during many retirement scenarios.

This does not mean everyone should immediately increase their withdrawals above 4%.

It means the opposite:

You should stop treating 4% as the answer and start using it as one input into your retirement analysis.

The NEW 4% Rule: Make It Personal

A better approach is to ask what withdrawal strategy works for your specific circumstances.

Your personalized withdrawal rate might be below 4%.

It might be around 4%.

It might be above 4%.

And it might change during your retirement.

That is the important difference.

Instead of asking:

"Can I retire if I withdraw 4%?"

Ask:

"What withdrawal strategy gives me a reasonable balance between enjoying my retirement today and preserving enough money for the future?"

That is a much better retirement planning question.

Your Retirement Length Changes Everything

One of the biggest limitations of the traditional 4% rule is that it is commonly associated with a 30-year retirement.

But not everyone has a 30-year retirement.

Someone retiring at 55 may need to plan for 40 years or more.

Someone retiring at 70 may need a much shorter planning horizon.

A withdrawal strategy that makes sense for a 40-year retirement may be unnecessarily restrictive for someone who has a shorter expected horizon.

Morningstar's research illustrates this relationship. Its research has found that retirees with shorter anticipated spending horizons can support materially higher withdrawal rates than those planning for a full 30-year retirement.

This is one reason a single withdrawal percentage should never be treated as universal.

Sequence of Returns Risk Still Matters

There is an important reason not to simply dismiss the 4% rule.

Sequence of returns risk is real.

The order in which investment returns occur can have a major effect on retirement sustainability.

Imagine two retirees who experience exactly the same average investment return over 30 years.

If one experiences several major market losses immediately after retirement, while the other experiences those losses much later, their outcomes can be dramatically different.

Why?

The first retiree is withdrawing money while the portfolio is falling. Those withdrawals can permanently reduce the amount of capital available to participate in the eventual recovery.

Morningstar's research has emphasized that large losses early in retirement are particularly damaging to portfolio sustainability, while the effect can be less significant after a retiree has already made it through many years of retirement.

This is why retirement planning cannot simply assume that average returns will arrive smoothly every year.

Taxes Can Change the Withdrawal Equation

Another major limitation of the 4% rule is that it generally focuses on portfolio withdrawals rather than the full tax picture.

A $40,000 withdrawal does not necessarily produce $40,000 of spendable income.

The tax treatment can depend on where the money comes from and where you live.

For example, retirement income may come from a combination of:

• Traditional IRA or 401(k) withdrawals
• Roth IRA withdrawals
• RRSP or RRIF withdrawals
• TFSA withdrawals
• Taxable or non-registered investments
• Cash savings
• Social Security
• CPP and OAS
• Employer pensions
• Rental income

These sources do not necessarily have the same tax consequences.

That means two retirees with identical portfolios may have very different after-tax retirement incomes.

For a deeper discussion of how taxes can change retirement outcomes, see How Taxes Affect Your Retirement Plan .

Reliable Income Changes the Equation

The 4% rule becomes even less useful when a significant portion of your retirement income does not come from your investment portfolio.

Consider someone who has $1 million invested but also receives $50,000 per year from pensions and government benefits.

That person's portfolio may only need to fund the difference between their desired spending and their reliable income.

If they want to spend $80,000 per year, the portfolio may only need to provide approximately $30,000 before considering taxes and other factors.

That is very different from someone who needs their $1 million portfolio to provide the entire $80,000.

This is why retirement planning should look at the entire household cash flow rather than applying a percentage to investments in isolation.

Your Spending Does Not Have to Stay the Same Forever

The traditional 4% strategy assumes a relatively rigid spending pattern.

Real retirement spending is often much less predictable.

You may spend more during the first years of retirement because you are traveling, renovating your home, visiting family or pursuing hobbies.

Later, your spending may decline.

Some expenses may disappear entirely.

Others, such as healthcare, support services or housing costs, may become more important.

Your retirement spending may therefore look more like a changing curve than a straight inflation-adjusted line.

That matters because a strategy designed around the assumption that you will spend the same inflation-adjusted amount for 30 years may cause you to save more than necessary or spend less than you could reasonably afford.

For more on this issue, see How Much Should I Spend in Retirement? .

What If You Are Willing to Adjust Your Spending?

This may be the biggest difference between the traditional 4% rule and a more modern retirement strategy.

Imagine that your portfolio performs exceptionally well during the first several years of retirement.

Under a rigid withdrawal strategy, you might continue taking the same inflation-adjusted dollar amount even though your portfolio has grown substantially.

But what if you could safely spend a little more?

Conversely, imagine the market falls sharply shortly after you retire.

Would you be willing to temporarily reduce discretionary spending?

If the answer to both questions is yes, you have more flexibility than the traditional 4% rule assumes.

Flexible withdrawal strategies can potentially allow higher lifetime spending while still managing portfolio risk. Morningstar's research has specifically examined flexible approaches, including strategies that adjust spending based on portfolio performance.

The New Rule Is About Guardrails, Not a Magic Number

A useful way to think about retirement withdrawals is through guardrails.

Instead of saying:

"I will withdraw exactly 4% forever."

you might establish rules such as:

• Maintain a minimum level of sustainable income.
• Increase discretionary spending when the portfolio is performing well.
• Reduce optional spending after significant market declines.
• Protect essential expenses with reliable income where possible.
• Review the plan as circumstances change.

This creates a retirement strategy that responds to reality rather than pretending that the future will follow a fixed mathematical path.

What About FIRE and Early Retirement?

The 4% rule is particularly important in the FIRE, or Financial Independence, Retire Early, community.

Early retirees often have much longer planning horizons than traditional retirees.

Someone retiring at 40 may need their assets to support them for 50 years or more.

In that situation, blindly applying the traditional 4% rule may not be conservative enough.

But there is another side to the argument.

Early retirees may have opportunities that traditional retirement calculations do not fully capture.

They may:

• Earn part-time income.
• Return to work temporarily.
• Reduce spending during market downturns.
• Delay government benefits.
• Use a combination of taxable and tax-advantaged accounts.
• Downsize their home.
• Adjust their retirement date.

Those choices can materially change the sustainability of the plan.

If you are considering early retirement, see Can I Retire Early? How to Know If You Can Afford Early Retirement .

So What Is the NEW 4% Rule?

If we had to reduce the modern approach to one sentence, it would be this:

Use 4% as a starting point, not a retirement prescription.

Your appropriate withdrawal strategy should consider:

• Your age when you retire
• Your expected longevity
• Your investment portfolio
• Your asset allocation
• Your expected investment returns
• Inflation
• Sequence of returns risk
• Your retirement spending
• Taxes
• Social Security, CPP, OAS and other government benefits
• Employer and other pensions
• Rental income
• Housing costs
• Whether you are willing to adjust spending
• Whether you want to leave an inheritance

Once all of those factors are considered, your ideal strategy may look nothing like a simple 4% withdrawal.

What Does a Personalized Retirement Plan Look Like?

Imagine two hypothetical retirees.

Both have $1 million invested.

The first retiree is 55 and expects to need the portfolio for 40 years. They have relatively little guaranteed income and want to leave a substantial inheritance.

They may want to use a withdrawal rate below 4%.

The second retiree is 72. They own their home, receive substantial government benefits and a pension, and expect to use most of their remaining investment assets over the rest of their lifetime.

Their sustainable spending strategy could potentially be higher than 4%.

The point is not that the second retiree should automatically withdraw 5%, 6% or 7%.

The point is that the same percentage does not make sense for everyone.

How Retirementize Approaches the Problem

This is exactly why Retirementize is designed around a complete retirement plan rather than a single withdrawal rule.

Instead of starting with a percentage and assuming the answer is correct, you can build a picture of your actual retirement.

Retirementize can account for your:

• Income
• Retirement spending
• Investment accounts
• Pensions
• Social Security
• CPP and OAS
• Taxes
• Home and other real estate
• Rental income
• Retirement age
• Longevity assumptions

You can then test different retirement decisions rather than relying on one generalized rule.

What happens if you retire earlier?

What happens if you spend more?

What happens if you spend less?

What happens if investment returns are lower?

What happens if you delay retirement?

What happens if you change your withdrawal strategy?

These are much more useful questions than simply asking whether your portfolio is 25 times your desired annual spending.

You can learn more about building your financial freedom plan in How to Create a Financial Freedom Plan .

Test the 4% Rule Against Your Actual Numbers

The most useful thing you can do with the 4% rule is test it.

Suppose you have $1.5 million invested.

A 4% withdrawal would suggest $60,000 in the first year.

But instead of stopping there, build a complete retirement projection.

Include your actual spending.

Include your expected pensions and government benefits.

Include taxes.

Include inflation.

Include your investment assumptions.

Then compare different strategies.

Try 3%.

Try 4%.

Try a higher withdrawal strategy.

Try retiring earlier.

Try retiring later.

Try spending more during the first decade and less later.

Try reducing discretionary spending after a significant market decline.

The objective is not to prove that a particular percentage is safe.

The objective is to understand how your entire retirement system behaves under different assumptions.

Monte Carlo Analysis Can Add Another Perspective

No retirement projection can predict exactly what markets will do.

That is why testing a retirement plan across many possible market paths can be useful.

A Monte Carlo retirement simulation can generate a range of possible investment return sequences and show how often a particular strategy succeeds under those simulated conditions.

It does not predict the future.

Instead, it helps demonstrate the uncertainty surrounding your plan.

Learn more in What Is a Monte Carlo Retirement Simulation? .

The 4% Rule Is Still Useful

After all of this, it would be a mistake to conclude that the 4% rule is useless.

It is still an excellent starting point.

If you have $1 million invested and expect to need $40,000 from your portfolio during your first year of retirement, knowing that this represents approximately 4% gives you useful context.

It can help you determine whether you are in the general neighborhood of financial independence.

It can help you compare different retirement scenarios.

It can provide a quick first-pass estimate before you build a detailed plan.

The mistake is treating that first-pass estimate as the final answer.

The Bigger Problem With Retirement Rules

Retirement rules are attractive because they make complicated decisions simple.

The problem is that retirement itself is complicated.

The 4% rule does not know your age.

It does not know your spouse's age.

It does not know your tax bracket.

It does not know when you will claim government benefits.

It does not know how much you actually spend.

It does not know whether you will travel extensively for five years after retirement.

It does not know whether you are willing to reduce spending after a market decline.

It does not know whether leaving $1 million to your children is a major priority or completely irrelevant to you.

A personalized retirement plan can.

PLAN. IMPROVE. TEST. CONFIRM. REPEAT.

The better approach to retirement planning is not to find one perfect withdrawal percentage.

It is to build a plan and continuously understand the decisions that could improve it.

PLAN. Build your retirement plan using your actual income, spending, investments, pensions, benefits, taxes and goals.

IMPROVE. Look for opportunities to improve the plan by changing savings, spending, retirement timing, investment assumptions, income sources or withdrawal strategies.

TEST. Test different retirement decisions and market conditions rather than relying on a single assumption.

CONFIRM. Determine whether the resulting plan provides an acceptable level of confidence for your goals.

REPEAT. Revisit the plan as your life, finances and assumptions change.

That is the new way to think about the 4% rule.

Frequently Asked Questions

Is the 4% rule still valid?

The 4% rule remains a useful retirement planning guideline, but it should not be treated as a universal rule. Your appropriate withdrawal strategy depends on retirement length, investments, spending, taxes, guaranteed income, market conditions and your willingness to adjust spending.

Can I withdraw more than 4% in retirement?

Some retirees may be able to sustainably withdraw more than 4%, especially when they have shorter retirement horizons, substantial reliable income or flexible spending. That does not mean everyone can safely withdraw more than 4%. A personalized analysis is necessary.

Is the 4% rule too conservative?

It can be for some retirees. A rigid strategy that assumes the same inflation-adjusted spending for a long period and never responds to portfolio performance can cause some retirees to underspend. For other retirees, particularly those with long horizons or limited guaranteed income, 4% may not be conservative enough.

What is a safe withdrawal rate?

A safe withdrawal rate is an estimate of how much you can initially withdraw from an investment portfolio while maintaining a chosen probability of not exhausting the portfolio over a specified period. There is no single safe withdrawal rate that applies to every retiree.

Does sequence of returns risk make the 4% rule safer?

Sequence of returns risk is one reason withdrawal strategies need careful testing. Poor investment returns early in retirement can be especially damaging because withdrawals are being taken from a declining portfolio. Flexible spending can help manage this risk.

Should I use the 4% rule for FIRE?

The 4% rule can be a useful starting point for FIRE planning, but early retirees may have much longer investment horizons than the traditional 30-year retirement assumption. A detailed plan should consider longevity, taxes, spending flexibility, future income and different retirement scenarios.

Continue the Financial Freedom Series

The 4% rule makes much more sense when viewed alongside the other parts of retirement planning.

Continue with:

• #2: How Much Money Do I Need to Retire?
• #4: How to Calculate Your Financial Freedom Number
• #7: Can I Retire Early?
• #11: How Much Should I Spend in Retirement?
• #13: How Taxes Affect Your Retirement Plan
• #17: Test Your Retirement Plan
• #21: What Is a Monte Carlo Retirement Simulation?

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