The 4% Rule Is Broken — Here’s What Actually Works

If your retirement plan is built around the 4% rule, you may be standing on a foundation that was never designed to hold your weight. Here’s what the research actually says — and what to do instead.

You’ve probably heard the rule: withdraw 4% of your retirement savings each year, adjust for inflation, and your money will last 30 years. Simple. Clean. Reassuring.

There’s just one problem. It doesn’t work anymore — and for many retirees, it never really did.

Nobel Prize-winning economist William Sharpe called the 4% rule “fundamentally flawed.” Morningstar research suggests the “safe” withdrawal rate may now be closer to 3.3%. And the rule’s own creator, William Bengen, has said the assumptions underlying his 1994 study no longer hold.

So if you’re planning your retirement around the 4% rule, it’s time for a serious conversation.

Where the 4% Rule Came From

In 1994, financial planner William Bengen published a landmark study in the Journal of Financial Planning. He analyzed historical stock and bond returns going back to 1926 and concluded that a retiree could withdraw 4% of their portfolio in year one, increase that amount with inflation each year, and have at least a 90% chance of their money lasting 30 years.

For its time, it was groundbreaking work.

But notice the key assumption: 30 years.

Bengen designed the rule for a retiree who was 65 in 1994, with a life expectancy of roughly 85. That was a reasonable assumption then.

Today, a healthy 65-year-old has a 50% chance of living to 87 — and a 25% chance of living to 92. Couples face even longer planning horizons. A 4% withdrawal rate that was designed for a 30-year retirement may simply not stretch far enough for a 35- or 40-year one.

Three Reasons the 4% Rule Fails Modern Retirees

1. Interest Rates Have Permanently Changed

Bengen’s study was based on historical bond returns from an era when 10-year Treasuries routinely paid 6-8%. Today’s bond environment is dramatically different. When the “safe” half of your portfolio earns far less, the math that justified 4% withdrawals simply doesn’t hold.

Morningstar’s 2023 retirement research team found that given current market conditions, a retiree who wants 90% confidence their money will last 30 years should only withdraw 3.3% — not 4%.

For a $1,000,000 portfolio, that’s the difference between $40,000/year and $33,000/year. That’s $7,000 in annual spending power gone — not because of bad investing, but because of a rule that was never meant for today’s market.

2. Sequence of Returns Risk Is Real and Devastating

The 4% rule uses average returns. But averages are misleading in retirement.

Here’s why: if the market drops 30% in your first two years of retirement while you’re withdrawing 4% annually, you’ve sold shares at the worst possible time. Those shares can never recover for you — they’re gone. The portfolio that remains has to work much harder just to break even.

This is called sequence of returns risk — and it’s the silent killer of retirement plans built on the 4% rule. Two retirees with identical portfolios and identical average returns can have dramatically different outcomes based solely on when the bad years hit.

3. It Doesn’t Match How People Actually Spend

Real retirement spending is not linear. As we’ve covered in our discussion of the Go-Go, Slow-Go, and No-Go years, retirees typically spend the most in their active early retirement years, less in their mid-70s to early 80s, and then face a spike in healthcare costs in their final years.

A flat 4% withdrawal adjusted for CPI inflation doesn’t reflect this reality. It either underfunds your Go-Go years (when you’d love to travel and enjoy life) or overfunds your No-Go years (when you’re largely homebound).

The Psychological Problem No One Talks About

Here’s something the financial planning textbooks don’t cover: the 4% rule is psychologically exhausting.

Every year, you have to ask yourself: Did the market go up or down? Am I still on track? Should I cut back this year? What if I live to 95?

Research consistently shows that retirees who rely on portfolio withdrawals for their basic living expenses spend their retirement worrying about money — even when they have more than enough. They underspend because they’re afraid. They don’t take the trip. They don’t help the grandkids. They hold back.

That’s not retirement. That’s financial anxiety with a different name.

What Actually Works: The Income Floor Strategy

The alternative to the 4% rule has been championed by retirement income expert Tom Hegna, backed by decades of research, and endorsed by leading economists. It’s called the Income Floor Strategy — and it works like this:

Step 1: Calculate Your Essential Expenses

Start by separating your expenses into two categories:

Essential expenses: Housing, food, utilities, healthcare, insurance, transportation
Lifestyle expenses: Travel, dining out, hobbies, gifts, entertainment

This distinction matters enormously. Not all spending is equal in retirement.

Step 2: Cover Essential Expenses with Guaranteed Income

Here’s the key insight: essential expenses should be covered by income you cannot outlive.

That means Social Security, pension income, and — if needed to fill any gap — annuity income. When your basic needs are covered by guaranteed income streams that arrive every month regardless of what the market does, you have eliminated the fundamental risk that the 4% rule tries to manage statistically.

You’ve replaced a probability with a guarantee.

Step 3: Invest the Rest for Growth (and Lifestyle)

Now comes the part most people miss: when your basics are guaranteed, you can actually invest MORE aggressively with the rest of your portfolio.

No more 60/40 balanced portfolio built to produce steady income. If your Social Security and annuity income covers your mortgage, groceries, and utilities, your investment portfolio is purely for lifestyle spending and legacy. It can handle more risk — and over a 25-year period, more risk means more growth.

The Income Floor Strategy doesn’t just protect you. It liberates you to invest better.

Step 4: Use Life Insurance for Tax-Efficient Legacy Transfer

The final piece is legacy planning. Rather than hoping your portfolio has something left when you die, you can use permanent life insurance to create a guaranteed, income-tax-free death benefit for your heirs — while spending your investments freely during your lifetime.

Tom Hegna calls this “Spend your money, leave life insurance.” It’s a powerful concept we’ll cover in a future post — but the idea is that you stop trying to die with a big pile of money and start living fully, knowing your legacy is protected.

The Income Floor in Practice: A Simple Example

Let’s say you’re 65 with $800,000 saved. Your essential expenses are $4,500/month.

4% Rule Approach:

Annual withdrawal: $32,000 ($2,667/month)
Social Security: $2,200/month
Total income: $4,867/month
Problem: You’re drawing down your portfolio every month. If markets drop, you’re selling at a loss. You spend 30 years hoping the math works out.

Income Floor Approach:

Social Security: $2,200/month
Annuity income (from $200,000 premium): $1,500/month
Guaranteed floor: $3,700/month — covers most essential expenses
Remaining $600,000: Invested for growth and lifestyle spending
Result: No matter what the market does, your bills are paid. Your investments can take more risk and grow faster. You sleep well.

The Bottom Line

The 4% rule was a useful starting point in 1994. But it was designed for a different era, different markets, and different life expectancies than what retirees face today.

The Income Floor Strategy — covering essential expenses with guaranteed income, investing the rest aggressively, and using life insurance for legacy — isn’t just more mathematically sound. It’s more livable. It gives you confidence. It removes the annual anxiety of “did I withdraw too much this year?”

You worked hard for decades to build your nest egg. You deserve a retirement income strategy that’s as reliable as the work you put in.

Take the Next Step

Rodney Cummings specializes in building personalized Income Floor strategies for Oregon and Pacific Northwest retirees. A 30-minute conversation can help you see exactly how much guaranteed income you could have — and what that would mean for the rest of your portfolio.

Schedule Your Free Retirement Income Review →

Or call directly: 503-832-8555

Legacy Wealth Services — Rodney Cummings, OR License #18847712, licensed in 22 states.

This content is for educational purposes only and does not constitute personalized financial, tax, or investment advice.