Does the 4 Percent Rule Still Work? Houston Wealth Manager Weighs-In

Have you heard of the 4 Percent Rule? It’s a rule of thumb that says if you withdraw 4 percent of your portfolio value at the beginning of retirement – adjusting it each year for inflation – your money will likely last at least 30 years. 

It sounds really great in theory: Just follow this simple rule, and you’ll never have to worry about outliving your money in retirement. But the problem with any "rule of thumb" is that it doesn’t account for your personal situation. It isn’t ironclad. You can’t follow it blindly without evaluating how it fits into your lifestyle.

There are some common problems with the 4 Percent Rule. In Linscomb & Williams’ 50 years of experience, we wanted to shed some light on when the 4 Percent Rule may work for you, and when it may not. 


Do you know where your money will come from in retirement? Contact the team at Linscomb & Williams and let us help you put a plan in place.


The 4 Percent Rule in Real Life

Everyone’s retirement plans look different, which is why generalizations can be dangerous.

The 4 Percent Rule does work for a lot of retirees, but here are 5 different scenarios for when the 4 Percent Rule may not work for you.

Scenario #1: You retire in a bear market.

Let’s say you retire with an investment portfolio of $1 million. You expect to withdraw 4 percent of your portfolio annually, which would be $40,000 for the first year. However, once you retire and start withdrawing, the market declines substantially. This can put the strategy at significant risk. To help avoid sequence of returns risk, you pivot your withdrawal strategy and pull from your cash reserves instead until the market rebounds. Once the market recovers, you start taking your 4 percent withdrawals, adjusted for inflation.

For more on how to retire during a bear market, read our eBook: How to Retire During Volatile Market Conditions.

Scenario #2: You don’t need the full 4 percent your first few years.

Once again, let’s say you retire with an investment portfolio of $1 million. You also have Social Security and some passive income from a few rental properties you own. After crunching the numbers, you realize you only need 2 percent of your portfolio value a year because of your other income streams. This puts you in a very favorable position. You can lower your withdrawal rate to reduce the probability of running out of money in retirement. Over time, you steadily increase this percentage until it’s back at 4 percent, adjusted for inflation. 

Scenario #3: Your retirement plans carry a hefty price tag. 

For some retirees, no longer having to go to work means time to finally travel the world, relocate to a dream destination or finally remodel the home, repair the roof and upgrade the back yard. These plans can be expensive and can also mean potentially spending more money in the process. CNN reported that 46 percent of seniors spend more during their first two years of retirement in living costs, and 33 percent maintain higher spending for the first six years of retirement. In this situation, you may need more of your portfolio than what the 4 Percent Rule allows. 

In these situations where spending patterns may be front-loaded, very careful and detailed analysis of your numbers can be appropriate. We work with one client who was building a long-planned retirement home in the Texas Hill country at the start of retirement. The building project took on a "life of its own" and we had to help the client re-evaluate alternate cashflow plans as a result. 

Scenario #4: You expect your retirement costs to change.

As CNN reported above, many retirees spend a lot of money in their first years of retirement, but once a few major goals are crossed off their retirement bucket lists – the roof is fixed, the trip to Ireland complete – their spending dips down. Maybe you start to spend more time at home. Maybe the costs to relocate were steep, but now you can settle into your new cost-of-living. This scenario can be flip-flopped as well. Maybe you decided to relax during your first few years of retirement but plan to take that trip or remodel the house later down the road. Healthcare costs can also increase as we age. In these situations, you may not need the full 4 percent every year, taking more some years, and less in others.

Scenario #5: Your asset mix is not 60 percent equities/40 percent bonds.

The 4 Percent Rule was initially created based on an asset allocation of 60 percent equities, 40 percent bonds. Unless your portfolio has this same mix, your portfolio will likely perform differently than that on which the rule was based. If you have more bonds, for example, your investments could grow at a slower rate and thus require a lower withdrawal rate than the 4 Percent Rule suggests. If you have more stocks, your portfolio could be even more susceptible to rough market conditions. 

The 4 Percent Rule isn’t the only well-known generalization when it comes to retirement planning. Read our recent blog posts:

Rules of Thumb to Forget: Number One …

Rules of Thumb to Forget: Number Two …

How a Wealth Manager Can Help You Decide

No one can predict the future. Your investment returns can influence the longevity of your nest egg. Lifestyles and family dynamics can change. Creating a safe withdrawal plan for retirement is not always as simple as following the 4 Percent Rule. The rule isn’t dynamic enough to account for market conditions and lifestyle changes in retirement.

Contact the wealth managers at Linscomb & Williams and let us help you put a realistic plan in place. Knowing how much you need in retirement can help you budget your assets accordingly and help ensure you don’t run out of money.

At Linscomb & Williams, our team of wealth managers can also help you: 

  • Create dynamic spending rules for your portfolio based on market volatility
  • Calculate how much you need to save to retire comfortably
  • Run your portfolio through several “what-if” scenarios to determine any red flags you may need to plan for

If you’re looking for a financial partner who offers individual, holistic financial planning, schedule a no-obligation conversation with our team. Linscomb & Williams is a fee-only, fiduciary financial planning and investment management firm headquartered in Houston, Texas. We have offices in The Woodlands and Austin, TX; Atlanta, GA; and Birmingham and Huntsville, AL; and serve investors nationwide. Learn more about how we can help you plan for tomorrow.

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Jessica Banitt, CPA, CFP®

Jessica Banitt, CPA, CFP®

Jessica Banitt is a Director and Wealth Advisor at Linscomb & Williams.

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Investment Advisory Services are offered by Linscomb & Williams, an SEC registered investment adviser, and a subsidiary of Cadence Bank. Linscomb & Williams (L&W) provides financial planning, investment management, and retirement plan and investment consulting services. L&W is not an accounting firm, and does not provide tax, legal or accounting advice.

Information expressed herein is based upon opinions and views of L&W and information obtained from third-party sources that Linscomb & Williams believes to be reliable, but Linscomb & Williams makes no representation or warranty with respect to the accuracy or completeness of such information. All opinions and views constitute our judgments as of the date of writing and are subject to change at any time without notice.