Why the 4% Rule Falls Short
By Angela Dorsey
You’ve done all the right things (financially speaking, at least) in saving for retirement. At Dorsey Wealth Management, we see the dedication it takes: starting early to harness compounding, maxing out your 401(k) and IRA contributions, making thoughtful investments, paying down debt, and optimizing Social Security. Your hard work has built a strong retirement nest egg.
But now comes the next question, and it’s a big one: How much can you safely withdraw so you don’t run out of money in retirement? With people living longer than ever, the fear of outliving your savings is real, and it needs to be addressed thoughtfully right from the start.
For decades, many have leaned on the so-called “4% Rule” to answer this question. Originally introduced by financial advisor Bill Bengen in 1994, this rule of thumb suggested that a retiree could safely withdraw 4% of their portfolio in the first year of retirement and then adjust that amount each year for inflation. According to Bengen’s research, this would generally support a 30-year retirement without exhausting your savings.
It’s a simple concept, and there’s a reason it became so popular: it offered people a straightforward way to turn their life savings into a kind of paycheck. Withdraw too little, and you might miss out on enjoying the retirement you worked so hard for. Withdraw too much, and you risk painful cutbacks later in life.
Why the 4% Retirement Withdrawal Rule May Not Work Today
However, while the 4% Rule can be a helpful starting point, it’s far from a one-size-fits-all solution. In fact, relying on it alone could leave today’s retirees vulnerable. Here’s why.
1. It overlooks your unique life.
Your retirement is uniquely yours. You may dream of visiting far-off destinations, or your happy place is staying close to family. Perhaps you have significant healthcare costs, or maybe you’re fortunate to have rental income or expect an inheritance. The 4% Rule doesn’t know any of this; it simply treats every retiree the same. A well-crafted withdrawal strategy considers your lifestyle, needs, and goals.
2. It ignores market fluctuations.
The 4% Rule is based on historical averages, but markets don’t move in neat, predictable lines. If you retire into a bear market and continue withdrawing the same amount, it could significantly increase the likelihood of running out of money. A dynamic, actively managed approach helps you adjust withdrawals based on real-time market conditions, protecting your portfolio in down years and leveraging growth when markets are strong.
3. It misses crucial tax strategies.
How you withdraw money matters as much as how much you withdraw. The 4% Rule doesn’t consider the tax impact of taking funds from different accounts (like traditional IRAs, Roth IRAs, or taxable accounts) or how to sequence withdrawals to minimize taxes. A thoughtful tax strategy can extend the life of your savings and give you more control over your income in retirement.
4. Life keeps changing.
Retirement isn’t static. Health changes, market surprises, evolving family needs, and new dreams can all reshape your spending patterns. That’s why having a trusted financial advisor matters. You get an evolving strategy, not a rigid rule—someone to help you adjust as life unfolds.
We’re Here to Help You Determine Your Retirement Portfolio Withdrawal Rate
The 4% Rule can be a helpful starting point, but it doesn’t offer the personalized, flexible approach needed for a confident and fulfilling retirement. A thoughtful plan doesn’t just help you avoid running out of money; it helps you enjoy the life you’ve worked so hard to build, on your terms.
At Dorsey Wealth Management, our focus is entirely on our clients. As a fee-only financial advisor, we prioritize transparency and providing objective advice. We’re dedicated to supporting you in pursuing your financial objectives with loyalty and care.
Whether you’re a current client with a specific financial concern or someone considering working with an advisor to build a comprehensive plan, we’re here to help at every stage. If you’re ready for a strategy tailored to your unique goals and circumstances (rather than a rule of thumb), we’d love to be your partner
Schedule a complimentary 30-minute introductory phone call to discover how we can help you retire with clarity and confidence. You can reach us at (310) 370-7776 or angela@dorseywealth.com. We’d love to help you create a retirement strategy that’s truly your own.