Is the 4% Rule Broken?


One of the biggest fears retirees, or those nearing retirement, face is that they will outlive their retirement assets. A recent article from Financial Advisor cites research that does little to alleviate those fears.

New research shows that Americans retiring in 2015 need to be far more conservative in their withdrawal rates during retirement. The historic 4% annual withdrawal rate is over two times the level that Americans can safely withdraw without expecting to outlive their assets. The real safe withdrawal rate, accounting for fees and today’s stock and bond market levels, is under 2% per year, according to the data. This study comes from Wade D. Pfau, Ph.D., CFA, a Professor of Retirement Income at The American College for Financial Services in Bryn Mawr, PA, and Director of Retirement Research for McLean Asset Management and inStream Solutions and Wade Dokken, Co-Founder and Co-President of WealthVest Marketing, a designer, marketer and distributor of private pension solutions focused on high consumer value.

Oversimplified Rule

According to Pfau and Dokken, William Bengen initiated the formal study in this area of “safe withdrawal rates” with an article he published in the Journal of Financial Planning in 1994. (AAII has a useful article that shows how the sequence of returns can impact your wealth). Bengen’s research was a response to previous simplistic approaches that plugged fixed return assumptions into a spreadsheet—before, if a retiree assumed there would be a fixed return of 7% a year on retirement assets, then he or she could take 7% out safely without tapping into principal.

Bengen recognized it was naïve to use fixed returns such as those for calculations, as they masked significant underlying financial market volatility.

In the process, he uncovered the concept of “sequence of returns risk.” The average market return over a 30-year period might be quite generous, but if negative returns occur early—when the retirees have just started unwinding their assets for spending—then their safe lifetime income would be severely threatened.

At the time, Bengen considered 30 years to be a reasonably conservative planning horizon for a 65-year-old couple. He then looked at all the different rolling 30-year periods of financial market returns in the U.S. historical record since 1926 (for example, 1926-1955, 1927-1956 and so on, up to 1985-2014, the most recent period available).

For a hypothetical retiree beginning retirement at the start of each year, he tested what was the highest sustainable spending rate as a percentage of retirement date assets, adjusted for inflation and meant to last precisely 30 years. Using a 50% to 75% allocation to the S&P 500, and putting the remainder into intermediate-term government bonds, he found that the hypothetical retiree in 1966 could withdraw just over 4% of his or her retirement date assets and sustain this spending level over 30 years. That was the worst-case scenario from the U.S. historical record.

This was simplified, but the idea of the 4% rule took hold in the popular consciousness for advisors and consumers alike.

Pfau and Dokken’s research attempts to overcome what they see are some assumptions Bengen used that do not reflect reality. Specifically:

  • International market data suggests the worst-case scenario would be worse than that seen in U.S. history and we overestimate future U.S.
  • The combined unprecedented low interest rate and high stock market valuation levels facing today’s retirees are extremely rare in the U.S. historical record. This leads to much lower returns over the following 10 years, when millions of baby boomers will leave the work force.
  • The 4% rule take into account other factors, such as investment fees, which need to be accounted for in any analysis.
  • As people live longer, 30 years is no longer a conservative planning horizon for 65-year-old couples.


Pfau and Dokken used used Monte Carlo simulations to estimate sustainable spending rates for retirements beginning in January 2015, and draw elements from previously published research articles. The research takes into account fees for both financial advice and fund management while also incorporating the heightened sequence of returns risk facing retirees in the current low-yield world and the reality that 30 years is increasingly not a conservative planning horizon.

The results showed that a 40% stock allocation and a 30-year planning horizon would support a 2.1% sustainable initial spending rate, provided one is willing to accept a 10% chance of failure. However, the authors state that very few investors would accept a 10% chance of outliving their money. Even a 2% withdrawal has a 10% chance of failure. The research shows that, over a 30-year horizon, the highest sustainable spending rate is 2.12% and this is with a 20% stock allocation.

Extending the horizon to 40 years, with 60/40 stock-bond asset allocation and acceptable failure probability, the sustainable spending rate drops even further, to 1.49%. Over a 40-year horizon, the highest rate is sustained with 40% stocks, though this spending rate has fallen to 1.55%.

With 100% stocks, the spending rate is 3.38% over 30 years and 2.74% over 40 years. However, the authors point out that those who are worried about outliving their assets will want to spend less initially so that they do not have a 50% chance of running out of retirement funds.

AAII Articles

If you want to learn more about how you can go about determining an acceptable withdrawal rate that meets your circumstances, be sure to check out these informative articles from AAII:



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