Fallacy of the 4% Rule

[KiwiFI]

Not sure if people are familiar with the original research behind the 4% SWR & it's author.

I know there's been a lot of opinion on the boards here suggesting it's arbitrary depending on your personal circumstances, & I agree, but as it turns out the author of the original study says it's way too low on reflection.

Out of almost 400 investors he studied, only that one investor had a safe withdrawal rate as low as 4.7%. For the rest of them, The average safe withdrawal rate was 7%, Bengen said.

https://www.marketwatch.com/story/the-guy-behind-retirements-4-rule-now-thinks-thats-way-too-low-heres-how-much-more-money-you-could-spend-fe71ebdf

You get the feeling that he now feels somewhat cursed by being the guy that came up with it in the first place!

 

[Dtail]

Yes the inflation rates of the 70's and early 80's have only come back briefly since then, but who knows what the future holds?
The concept of Firecalc and the like is to use historical sequencing. Effectively Bengen would be using that sequencing but ignoring the 1970's. Does not really make sense.
Before he came along, some recommendations out there was that 7% was a safe WR% due to an average 10% return and 3% inflation. This concept totally ignores the SORR concept.
Without the worst 5 or 6 times sequences to start a retirement, an average WR% of 6.5% can work.
If one retired in 1982, it was over 10%, but this is all in hindsight.

 

[Koolau]

I've mentioned (several times) that I've never actually used the 4% rule as it was "intended." I didn't start with 4% WDR and enhance by the inflation rate of the previous year.

Instead I said "How much money do I need to retire?" If the 4% rule is "real" then how big a stash do I need such that 4% of it will fund me for a year. Simple algebraic manipulation says 25 X my yearly spend.

That's the 4% rule in my hands. That's what I saved (give or take).

So, we've seen studies suggesting the 4% rule should really be 3.5% and now here's one that say 4.7%. After 20 years of FIRE, I don't much care or think about it any more.

My only thinking is that I'm so glad I saved a million too much rather than $50K too little.

 

[Koolau]

Yes the inflation rates of the 70's and early 80's have only come back briefly since then, but who knows what the future holds?
The concept of Firecalc and the like is to use historical sequencing. Effectively Bengen would be using that sequencing but ignoring the 1970's. Does not really make sense.
Before he came along, some recommendations out there was that 7% was a safe WR% due to an average 10% return and 3% inflation. This concept totally ignores the SORR concept.
Without the worst 5 or 6 times sequences to start a retirement, an average WR% of 6.5% can work.
If one retired in 1982, it was over 10%, but this is all in hindsight.

Yeah, I think '69 was a bad year to retire IIRC.

I've mentioned one of my direct reports who FIRE'd before I did and just loved rubbing my nose in it. He said he'd found a broker who would write covered calls for him and make him enough that he could retire with 8% WDR. His stash lasted (wait for it) 2 years IIRC.

 

[Dalton]

It's aged. It's not like he lied about it. And, the new number being higher still allows 4% to be a SWR.

 

[Koolau]

It's aged. It's not like he lied about it. And, the new number being higher still allows 4% to be a SWR.

Yeah, think how many 30-year periods we've added since Bill Bengen did his great wor*k.

 

[pb4uski]

It looks to me like the 4% rule has aged well. If you take FIRECalc and put in a $1m 60/40 portfolio with a 30 year time horizon and solve for safe spending at 95% success you get spending of $40,576 or 4.0576%.

The 4% rule is intentionally not worst case, but bad case scenario to make it highly likely that you don't run out of money.

 

[KiwiFI]

It's aged. It's not like he lied about it. And, the new number being higher still allows 4% to be a SWR.

yes, agree. That was then, this is now.

The point he makes is that people could be living better lives if they chose to but the conviction around 4% remains for many.

Each to their own. My father is just fine spending roughly 3.5% of his modest NW. Good for him.

 

[Koolau]

yes, agree. That was then, this is now.

The point he makes is that people could be living better lives if they chose to but the conviction around 4% remains for many.

Each to their own. My father is just fine spending roughly 3.5% of his modest NW. Good for him.

My gut tells me that most folks starting out - and actually "using" the 4% rule - will figure out in a few years that they can spend more. At THAT time, they will likely begin to spend more. How much better an approach is that than starting at say 5% spend and find out it's too much. Always easier to spend more than to spend less IMHO. No rule is perfect. Let's call the 4% rule a "good" rule.

 

[marko]

I thought the collective here decided that it's not a "rule" but a "guideline". Few, if any follow it literally but for those just starting out, it's more about giving you an idea of what is/is not possible.

But here's a question: OP hails from Australia. Is the 4% guideline based mainly upon US markets? What if an early retiree is heavily invested in markets that are less productive than the US (not that Australia isn't, but some other places that are)?

 

[DrRoy]

4% is the figure that worked for the worst 30 year interval in the survey period. Of course other intervals would work with a higher figure.

 

[Andre1969]

4% is the figure that worked for the worst 30 year interval in the survey period. Of course other intervals would work with a higher figure.

There are six 30 year periods that would have failed, over the last 125 years, according to FireCalc, at 4%. I think 4% was designed to give you roughly a 95% chance of success, not 100%. To get to 100%, you need to cut back a bit, to a 3.55% withdrawal. At least, at 3.5% I get 100%. At 3.6% I get 99.2% (1 cycle failed). So I split the middle at 3.55% and got 100%, but didn't feel like fine tuning it any further than that.

 

[CaptTom]

The point he makes is that people could be living better lives if they chose to but the conviction around 4% remains for many.

I'm not so sure about the use of the term "better" in this context. Certainly many of us don't splurge or BTD as much as we technically could. Does that make our lives any worse?

It's hard to put a dollar value on the peace of mind you get from knowing you've got a big of a buffer available.

 

[ShokWaveRider]

We do not and have never used it (4% Rule), if we did it would be 2 x as much as we get in SS (between the 2 of us). As our SS covers ALL our yearly recurring expenses including Healthcare, Food and drink. Currently we use our nest egg for Travel and the bigger discretionary expenses like: Cruises, House painting, A New Kitchen, New Living Room Suite and stuff like that. It gives us a level of comfort to live like that. I am sure we will need the extra stash sooner or later the way the country is heading.

 

[dixonge]

Extremely interesting that those he talked to actually averaged more like 7% withdrawal rates! That's pretty crazy...

 

[AZsniper]

IF you think about it, 4% is just 1/25th, so over 30 years you are just hoping to make up 5 years in growth to get to your thirty years. I believe you can achieve that with less than a 2% annual growth on average.

I know the market doesn't grow consistently and there are SORR and such, but 4% is a WORST CASE SCENARIO.

I just asked Chat GPT to see what 1million would be today if I retired 30 years ago to the day in 1995, assuming actual SP500 returns and using 4% withdraws with actual CPI increases, and I would have 968,000 after 30 years of withdraws.

For me 4% is just a general thought exercise, and now Bengen says 4.7 up to 5.

Check this out >>> Is the 4% Rule Obsolete? - TheWeFIRE

 

[ElizabethT]

We are at 2%, plus SS and pensions. It is so, so hard to go above that 2% figure due to the 'what if' noises our heads make. During wild market fluctuations, such as what we are experiencing in 2025, I was/am bothered, but not panicked. So it's hard for me to put a price on that peace of mind.

My idea of 'blow that dough' is to buy a new Toyota Rav4 hybrid now, instead of waiting till 2026, when we have it already budgeted for.

At a certain level I think we're hopeless. Our lives are already packed with activities, even at 2%. When we added SS and pensions on top of that recently, it felt positively decadent. Our kids and grandchildren will benefit someday, but we can live with that.

 

[silvor]

The 4% rule audience was Advisers. Of course it’s geat. For advisers.

 

[CalBird]

It’s more about financial safety vs financial efficiency. 4% will give you solid safety, but there’s high chance you end up with lots of money you can’t spend. When you add social security income down the road and spending going down in later phase, your spending will never catch up with your money growth. Over saving is wasting money and wasting life.

 

[Gumby]

It’s more about financial safety vs financial efficiency. 4% will give you solid safety, but there’s high chance you end up with lots of money you can’t spend. When you add social security income down the road and spending going down in later phase, your spending will never catch up with your money growth. Over saving is wasting money and wasting life.

Only if you equate money with life.

 

[sparky08]

We are closer to 5%. And when we start taking SS in 5 years, it will be half that.

Annually, our portfolio has been growing more than we've been taking out. I'm not worrying. But we do have some discretionary spending that we can cut back on if we need to.

 

[Lorenzo]

The 4% rule audience was Advisers. Of course it’s geat. For advisers.

I agree--some advisors blithely quote the 4% rule just to cover their you-know-whats. When I first started chatting with my then-advisor about retiring in a few years, he immediately brought up the basic 4% rule. I listened and replied that I had recently read a couple of articles suggesting that 4% might not be conservative enough, and other articles offering alternative withdrawal methods, and I asked him what he thought about more recent work like that. He immediately replied, with the same indifference, "Well, we can use a 3.5% withdrawal rate." I bit my tongue, but what I wanted to bark at him was along the lines of, "I didn't hire you to simply execute a well-known rule of thumb or to toss the ball right back into my court; I hired you to give me your opinion based on your expertise and my personal situation as to how much I can safely withdraw in retirement for 30 years." This was shortly before I fired him. I'm sure he loved the 4% rule because it freed him from doing the difficult analyses and offering an actual opinion based on his supposed expertise.

 

[COcheesehead]

Extremely interesting that those he talked to actually averaged more like 7% withdrawal rates! That's pretty crazy...

I put that into FireCalc and my plan crashes and burns. 5% is doable though.

 

[Gumby]

Yeah, I think '69 was a bad year to retire IIRC.
.....

I believe that in FIRECalc, 1966 was the absolute worst year to retire.

 

[MichaelB]

This is not a new topic. Bengen is looking at returns over the past 2 decades and saying “Oh, look, equities have done really well and we could have spent more”.

I agree with pb4uski, the 4% rule of thumb has held up well. It’s certainly no fallacy. Keep in mind, the primary objective is not to maximize withdrawals, it’s to determine a high level of withdrawals while maximizing survival odds of the portfolio.

The most important condition is portfolio survivalability, and sustsinsble withdrawal % follows.