You’ve seen it everywhere.
Simply take out four percent each year, and all should be well.
It’s repeated like gospel. Quoted in podcasts. Whispered at dinner parties. Printed in bold on retirement brochures.
But here’s the uncomfortable truth no one wants to admit.
The 4% rule is broken.
It’s not “kind of outdated.” It’s not “needs tweaking.”
Broken.
If you retire today, the 4% rule could leave you eating ramen at the age of 85 and moving in with your kids.
I’m not exaggerating.
I have talked to people that saved enough money for a good life. Maxed out their 401(k)s. Followed the 4% rule to the letter.
And by year 12? They were sweating every market dip. Cutting back on meds. Canceling trips. Seeing the value of their investment drop while inflation took away 8 percent of their money’s buying power.
The 4% rule wasn’t designed for this world.
It began in 1994, when bond yields were at 6%, valuations were cheap, and inflation was predictable.
Today? We’ve got mortgage rates at 4%, CAPE ratios in the high 30s, and healthcare costs that increase 3x faster than CPI.
The 4% rule survived backtests that were 30-years long. Therefore, it still works if that’s how you define it.
But retirement isn’t a spreadsheet. It’s your life.
If you wish to exist instead of just subsisting, then a good plan is a necessity.
In this guide, I’ll show you.
- The origin and working of the 4% rule—and what’s wrong with its assumptions.
- The three secret problems that lead to a failure in reality are sequence risk, inflation spikes, and longevity.
- What’s better than the 3% or 5% increases you might be getting? Flexibility.
- Experience real portfolio stress tests from years 2008, 2022, and projections for 2025 to see the damage.
- My absolute favourite is the “Guardrails Strategy” allowing you to spend with confidence without blowing up your portfolio.
This isn’t fear-mongering. It’s future-proofing.
Let’s begin.
What Does 4% Rule Mean? The Untold Origin Story Of Iran
In 1994, an advisor Bill Bengen did something very powerful.
He analyzed 75 years of financial data, including stocks, and posed the questions, what is the return on stocks?
“What is the maximum yearly withdrawal rate that would have lasted 30 years?””.
His answer? 4%.
To be more precise, if you withdrew 4% of your first year’s portfolio and then increased that dollar amount for inflation every year afterwards, that portfolio would have lasted for 30 years, even if you retired at the worst possible time such as 1968 or 1929.
It was elegant. Simple. Clean.
And it went viral.
In the last 30 years, “the 4% rule” has become the primary goal of retirement plans.
But here’s what Bengen himself said in a 2020 interview.
I never meant it to be a hard rule. It was a starting point. A worst-case scenario. People took it as gospel.”.
Ouch.
It is 4% of Starting Balance – Not Current Balance.
This is where most people get it wrong.
The 4% rule says.
- In the first year, take out 4% of your original investment.
($40,000 if you have $1M). - In Year 2 you take out $40K + inflation—say $41,200 if inflation is 3%.
- In the third year, the amount is $41,200 plus inflation, an accounting measure for inflation changes.
- You never adjust based on your current portfolio value. If your portfolio fell to $600K you still take out $42,000.
That’s not a strategy. That’s a suicide pact.
Why Retirees Will Face Problems With The 4% Rule In 2025 (The 3 Critical Flaws)
Flaw #1: The Silent Killer: Sequence of Returns Risk
Imagine two retirees.
- Individual A: 2017 Retirement. Year one stock prices increase 15%. Portfolio: $1.15M. Withdraws $40,000. Easy.
- Retiree B’s 20% stock loss after retiring. Portfolio: $800K. Withdraws $40,000. Now at $760K.
Same withdrawal rate. Same portfolio. Same person.
But Retiree B is in deep trouble.
Why? When you have early losses and fixed withdrawals, it creates a hole you can’t climb out of.
The 4% rule assumes “average” returns. But returns aren’t average — they’re lumpy. And the order matters more than the average.
Flaw #2: Inflation now is out of control and unpredictable. It’s over 3%
The 4% rule assumes 3% inflation. Forever.
The actuality is that the inflation was 8% in 2022. 2023: 4%. 2024: 3%. 2025: ????
If inflation reaches 6% for two years, your “safe” withdrawal of $40,000 now buys you $45,000 worth of stuff – but your portfolio doesn’t grow.
Result? You’re spending more of your principal. Faster depletion.
Flaw #3: Following Your Minimalism Advice Is Financial Death, Not Freedom
The 4% rule was designed for 30-year retirements.
But if you retire at 62? You’ll have one in two chances that one of you will live to 95, or over 33 more years.
And if you’re healthy, active, and have good genes? 40 years isn’t crazy.
Retirement should follow a rule of 3.5% to lead 40 years.
Does It Still Work, The 4% Rule? Let’s Stress-Test It (2025 Edition)
Let’s run through three real-life scenarios using 2025 assumptions.
Test 1: The Optimal Storm Retiree Was Retired In December 2021
I have allocated $1M with 60% in VTI and 40% in BND.
Withdrawal: $40,000/year, adjusted for inflation.
Inflation: 7% (2022), 3% (2023–2025).
Market: -20% (2022), +12% (2023), +5% (2024), +4% (2025 proj.).
Result after 4 years.
- Portfolio: $780,000.
- Withdrawals taken: $178,000.
- Inflation-adjusted spending power: Down 15%.
- Projected breakdown in year 25. Not Broken.
Test 2: The Lucky Retiree (Retired Dec 2023)
Same portfolio, same withdrawal.
Market is expected to grow by 25% in 2023, 10% in 2024 and 5% in 2025
Inflation: 3% avg.
Result after 2 years.
- Portfolio: $1.22M.
- Withdrawals: $83,000.
- Feeling rich… but it’s an illusion. The next crash will hurt.
Verdict: ✅ Works… for now. But it’s fragile.
Test #3: The Flexible Retiree (Using Guardrails)
Same as Test #1 — but with one change.
Depending on the value of one’s portfolio value of the adjusted withdrawal may maximum as +5% and minimum as –2.5% per year.
Result after 4 years.
- Year 1: $40,000.
- In the second year the portfolio dropped, so the withdrawal was cut to $39,000.
- Year 3: $39,000 (no raise).
- Year 4: $40,500 (portfolio recovering).
- Portfolio: $890,000.
- Projected to last 35+ years.
Verdict: ✅✅✅ This works.
What Is Better Than 4% Rule? Three Modern Strategies That Survive In 2025
Strategy #1 The Guardrails Approach (My Favorite)
Start with 4%. But set limits.
- When your portfolio’s returns are over 5% in inflation, you may increase your spending by 5%.
- If your portfolio returns are over 2.5% below inflation, reduce spending by 2.5% or less.
The reason behind its functioning is that in good times you spend more and in bad times you spend less in a panic free manner.
Example.
- Year 1: $1M → $40,000.
- Second year: 1.1M dollars 42,000 dollars (maximum 5%).
- The third year: $850,000 which are at least -2.5% 39,000$.
- Fourth year: $900K is $39,000 (No change).
According to the report by Morningstar, this raises the odds of success from 80% to over 95%+.
Strategy #2 Share of the Portfolio Method.
Withdraw a fixed % of your current portfolio each year. No inflation adjustments.
3.5% is the new “safe” starting point.
- Year 1: $1M → $35,000.
- Year 2: $1.2M → $42,000.
- Year 3: $900K → $31,500.
Pros: Impossible to run out. Automatically adjusts for markets and inflation.
Cons: Income swings wildly. Not for the faint of heart.
Use Social Security and Fix income together to cover essentials Use percentage method to set aside money for entertainment purposes.
Strategy #3 Is the Cape-Based Withdrawal For the Nerds
Adjust your withdrawal rate based on market valuations.
- CAPE > 30? Withdraw 3.5%.
- CAPE 20–30? Withdraw 4%.
- CAPE < 20? Withdraw 4.5–5%.
You reduce your risk when taking out a market loan. When the market is high, you take less. When the market is cheap, you take more.
Find CAPE at multpl.com.
The 4% Rule Misses Something Big: All The Healthcare Costs!
The 4 percent rule assumes your expenses remain steady after CPI.
Reality? It costs between $7,000 and $10,000 each year for a couple aged 65 due to health care which is not fully covered by medicare. And that’s before long-term care.
If you are concerned about how health costs might affect your withdrawal strategy, take into account that even low premium plans like HDHPs come with out-of-pocket expenses that can be very damaging to your portfolio. So always stress test for $15,000/year in medical costs.
If you earn money on the side, protecting your freelance income is not just good for cash flow. It frees you up, so you don’t need your portfolio to bail you out when earnings drop.
What Experts Are Saying? (2025 Research Update)
- A safe starting rate for a 30-year horizon is now 3.8%, and a 40-year is 3.3%. According to Morningstar (2024).
- Bengen (2023): “The current environment warrants a 4.5% reduction.” Begin with a 4.1% borrowing rate but be prepared to drop rates.
- According to the Kitces of 2025, the 4% rule is a thing of the past. A rational approach is towards spending rules that are dynamic.
Consensus? The 4% rule is dead as a rigid strategy. But alive as a starting point — if you add flexibility.
Things You Should Ask A Real Expert
What’s the new safe withdrawal rate for 2025?
If high confidence is desired, expect rates of 3.5–3.8%. If you are flexible with backup income, 4%.
Can I still use the 4% rule if I have a pension?
Yes! Think of your pension as your “floor.” This gives you the ability to take more risk with your portfolio.
How do I adjust the 4% rule for high inflation?
Skip the inflation raise in down years. Or switch to percentage-of-portfolio method.
Should I include my home equity in the 4% calculation?
No. Unless you downsize or get a reverse mortgage, it’s not liquid.
What’s the biggest mistake retirees make with the 4% rule?
Taking out the same amount from your investment in every market condition.
Does the 4% rule work for early retirees?
No. For retirements that are more than 40 years, begin at 3.2–3.5%.
How do taxes affect the 4% rule?
Withdrawal rate is pre-tax. If you need $40,000 after tax, withdraw $50,000. Factor in taxes.
Should I annuitize part of my portfolio to make 4% work?
Yes. A SPIA can provide guaranteed income. Use it to cover essentials, then apply 4% to the rest.
What’s the best asset allocation to pair with the 4% rule?
50% stocks / 50% bonds. More stocks = more growth but more risk.
How often should I recalculate my withdrawal rate?
Annually. Check your portfolio, adjust based on strategy.
Can I increase my withdrawal rate if I’m in good health?
No. Health doesn’t change market risk. Stick to the math.
What’s the role of Social Security in the 4% rule?
It’s your safety net. Delay it to 70 if possible. Use it to cover fixed expenses.
How do I handle RMDs with the 4% rule?
Withdraw RMDs first. If you don’t need it, reinvest in taxable account. Don’t overspend.
Should I pay off my mortgage before using the 4% rule?
If rate <4%, keep it. Else, pay it off for peace of mind.
How does long-term care factor into the 4% rule?
Assume $100,000+/year for 2–3 years. Buy LTC insurance or set aside a separate fund.
What’s the best way to track my withdrawal rate?
Start balance, withdrawals, end balance. Recalculate annually.
Can I use rental income as part of my 4% strategy?
Yes — but assume 50% goes to expenses, vacancies, repairs.
How do I adjust for a bear market?
Reduce spending. Tap cash/bonds. Avoid selling stocks.
Is it better to withdraw monthly or annually?
Monthly for budgeting. But calculate annual amount first.
What’s the one thing I should never do with the 4% rule?
Fear should not cause you to sell all your stocks following a crash. Stick to your plan.
Conclusion: The 4% Rule Hasn’t Died — Just Evolved
The 4% rule was never meant to be carved in stone.
The Stranger Things-like blacklight had just the right brightness to break the ice.
Today? We have better tools. Better data. Better strategies.
You don’t need a rigid rule. You need a responsive system.
It allows you to spend freely during good years… and withdraw easily during bad ones.
One that respects the disorder of the market and your right to be fully alive.
So yes — start with 4%.
But don’t stop there.
Add guardrails. Add flexibility. Add a cash buffer.
Because retirement isn’t about surviving. It’s about thriving.
And with the right strategy? You will.
