Is It Time to Move Beyond the 4% Rule?

By Michele Harris
November 21, 2022
Couple reviewing finances

In 1994, William Bengen, a certified financial planner, published a paper advising retirees to withdraw no more than 4.2% of their portfolio in the first year of their retirement. He went on to suggest that retirees should adjust how much they draw in subsequent years, based on the current inflation rate. His plan, known as the "4% rule," has become a widely used strategy for retirement planning.

While the rule has merit and is a good starting point, many financial planners now say that retirement spending should not be seen as a "one-size-fits-all" strategy, considering the current economy.

We asked three financial planners to share their thoughts on the 4% rule. Is it still a reliable way to plan, or is there a better approach? Here's what they said:

"While the 4% rule has been gospel among retirees, helping them determine what percentage of their savings they should spend in retirement, the economy has changed, and so should this approach," says Bill Ryze, a chartered financial consultant from Memphis, Tenn. "Given the current economic situation, retirees might want to consider cutting back on their spending and, if possible, lower their rate of withdrawal. In this economy, 4% is a little too aggressive - 3% is ideal for now."

"The 4% rule is nearly inapplicable to present-day circumstances in retirement," says Brad Biren, a tax and elder law attorney in Des Moines, Iowa. "For example, there is the basic issue of life expectancy and quality of living. In addition, the two highest expenses for seniors are housing and health care, both of which fluctuate in price erratically from year to year. Knowing that each person has different needs, how can the 4% rule apply to more than a sliver of the very wealthiest and healthiest people?"

"Rather than using impersonal and potentially unreliable rules of thumb, a proper analysis addressing all of one's objectives, reliable assumptions, and limitations can be performed by any qualified financial practitioner; and most will perform these at little or no cost," says Rob Drury, executive director of the Association of Christian Financial Advisors in San Antonio, Tex.

If you've been living by the 4% rule, it may be time to rethink your approach. Speak with your financial planner to see if you should adjust your plan.