Transcript:
Hey, guys. Mike Frontera here, back with another Retirement Theory video. I’ve been working with clients for over 22 years, and I’ve probably heard just about every financial planning rule of thumb in the book. But for sure, the one I’ve heard the most is the 4% withdrawal rule.
And you’ve probably heard of it too—the one that says you can safely withdraw 4% of your portfolio each year in retirement. I’ve heard it in articles, books, podcasts, from clients, and just from everyday folks. It’s an easy rule to remember, and it’s a handy way to calculate how much money you need to save for retirement.
The problem is, it’s so far off from reality that it’s actually better to just ignore the rule than to even use it. For those who don’t know, let me give you a quick background. The 4% withdrawal rule was born out of a 1994 study by William Bengen. He tested various portfolio withdrawal rates over countless 30-year rolling periods in the market. He found that if you started with a 4% withdrawal rate and increased it each year for inflation, you would have safely made it through every one of those withdrawal periods. The worst case was one that started in the 1960s, going through major market downfalls, poor stock and bond performance, and high inflation.
So that veritable worst-case, lowest-common-denominator scenario became a “rule” for retirement planning. And that’s the first problem—it’s too darn conservative. In fact, Bengen himself has revised the rule twice: once in 2006, raising it to 4.5%, and again just this year, raising it to 4.7%. Yet the original 4% rule is the one most people remember.
You might think, “Well, I’d rather plan conservatively than spend too much and risk running out of money.” There’s some truth to that. But you also need to recognize the time and effort it takes to build a large enough portfolio to support such a small withdrawal rate. That often means either having less time to enjoy your retirement, or unnecessarily keeping your standard of living lower to comply with the rule. And that balance isn’t considered in the 4% rule.
But the conservative withdrawal rate isn’t even the rule’s biggest weakness. The next issue is the portfolio tested in the study. Bengen built his analysis on a static portfolio: half in large-cap U.S. stocks (the S&P 500) and half in intermediate-term U.S. Treasuries (the Ibbotson Treasury Index). That’s it—no small caps, no international, no real estate, no corporate bonds. Nothing that would diversify a real portfolio.
Why is that such a big deal? Because in retirement, diversification is more than just risk and returns. It gives you flexibility to choose different asset types for income depending on market conditions. But the study assumed autopilot withdrawals—selling across the board no matter what the market looked like. Real retirement portfolios shouldn’t operate that way.
We talk about many distribution strategies: bucket segmentation, rising equity glide paths, guardrails, tax-managed distributions—methods to create more income from the same assets. The study ignored these, and it also failed to address one of the biggest retirement risks: sequence of returns risk. Put simply, that’s the danger of having bad market returns early in retirement. While order of returns doesn’t matter when you’re just growing a portfolio, it’s critical when you’re withdrawing. If losses hit early, your portfolio shrinks while you’re pulling money out, and even if the market recovers, it’s on a smaller base. That can permanently weaken your nest egg.
In Bengen’s study, some of the lowest withdrawal rates came from periods with poor early returns. But no steps were taken to address sequence risk—not even simple ones like having a cash or bond bucket for down years, or reducing withdrawals when markets perform poorly. (By the way, I’ve covered sequence risk in more detail in another video—link in the description.)
Another flaw is the time horizon. The study used 30-year retirement periods. That works if your retirement is exactly 30 years—but how often does that happen? What if you retire at 55 and need income for 40+ years? Or retire later and only need 20–25 years? The truth is, none of us know how long we’ll live, which makes planning tough. But the 4% rule just assumes “30 years.”
Finally, the most glaring issue: withdrawals in retirement are not flat, inflation-adjusted amounts each year. Real life spending is lumpy—big years, small years, unexpected expenses. To show you, let’s look at Jerry and Jenny.
Jerry and Jenny are about to retire with just over $2 million in invested assets. A Monte Carlo simulation shows their retirement has a 98% success probability—they’re well funded. Looking at cash flows, they have income sources besides their portfolio: Social Security and a $20,000 pension. Jerry takes Social Security at 70, Jenny at 69. This staggered income means portfolio withdrawals vary over time.
Like many retirees, their biggest withdrawals are early, before Social Security starts. Their expenses are also uneven. They have a mortgage until it’s paid off, healthcare costs rising faster than inflation, a major home renovation, periodic new cars (paid in cash), a travel budget for their first 15 years, and occasional unexpected expenses. None of this matches a neat, inflation-adjusted line.
As a result, their withdrawals vary widely. They started with $2,090,000. The 4% rule would say $83,600 per year plus inflation. But in reality, their first year withdrawals are $153,000 (over 7%). Later, Social Security reduces their need to withdraw, sometimes under 4%. But then a big renovation pushes withdrawals higher again. Over time, the pattern is uneven—7%, 8%, then under 4%, then back up.
So how useful is it to know they “could withdraw $83,600” every year? It’s so detached from reality that it’s better to ignore the 4% rule than to use it.
In many years, especially the early ones, Jerry and Jenny withdrew far more than 4%. In other years, less. The point is that retirement withdrawals are variable, flexible, and unpredictable—far beyond a simple rule. So much so that I don’t even consider the 4% rule to be a good guideline.
Do you have questions for me? Let me know. Come visit me at RetirementTheory.com or send me an email at mike@retirementtheory.com. Thanks for watching, and we’ll see you next time.