Is the 4% Rule Still the Gold Standard for Retirement?

If you're closing in on retirement, you've probably come across the 4% rule. It’s one of those financial rules of thumb that’s stuck around for decades, like the idea that you’ll spend less in retirement (not always true) or that you should shift everything to bonds after 65 (also not always true).

But does the 4% rule still hold up today? Let’s break it down.

What is the 4% rule and how does it work?

The 4% rule comes from a famous study in the 1990s by financial planner William Bengen. He looked at different market conditions going back decades and concluded that if retirees withdrew 4% of their retirement savings in the first year – and then adjusted that amount for inflation each year – they had a pretty good chance of their money lasting 30 years.

So if you had a $1 million portfolio, you’d withdraw $40,000 in year one. In year two, you’d increase that amount by inflation, say 3%, and take out $41,200. The idea is to create a consistent income stream that adjusts with the cost of living, without running out of money.

Sounds simple. So what's the catch?

Life. Life is the catch. Retirement doesn’t follow a straight line, and neither does spending. Research from J.P. Morgan Asset Management shows that retirees don’t spend at a fixed pace each year. Expenses often follow a “spending curve,” peaking at midlife (hello, bucket list trips), dipping in the middle (fewer adventures, more time at home), and then potentially rising a little in later years (often due to health care or long-term care costs).

On top of that, market conditions have changed. The original 4% rule study was based on a world with higher bond yields and different life expectancies. People today are living longer, investing differently, and facing a more unpredictable global economy.

There’s also the matter of required minimum distributions (RMDs) kicking in around age 73, which can disrupt a fixed withdrawal plan, whether you like it or not.

Should people still use the 4% rule?

Think of it more as a starting point than a rule. It’s a helpful guideline, something to plug into a calculator or conversation to get the wheels turning. But it’s not the finish line.

Some years you may need to withdraw more, some years less. If the market’s down, it may make sense to tap cash or reduce spending temporarily. If your portfolio has outperformed, you might splurge or give more generously.

Flexibility is key.

So what’s the better approach today?

Rather than following a static rule, the better approach is to treat your retirement plan as something living and breathing. Build in flexibility. Account for taxes, Social Security timing, health care needs and RMDs.

And check in regularly, because what works in your early 60s might need a tune-up by your 70s.

Working with a financial advisor can help you model different scenarios and stay on track even when the market throws curveballs. The goal isn’t to follow a perfect formula, it’s to make sure your money supports the life you want, for as long as you need it.

Because the only rule that really matters? Making sure your retirement works for you.

If you’re thinking about how much you can safely withdraw, or whether your plan is built to adapt to the real world, Advance Capital Management is here to help. A conversation with one of our financial advisers can give you clarity on what’s possible and how to adjust your strategy as life changes.

Schedule a time to talk and get a personalized plan that fits the way you actually want to live in retirement.